UNIT 2AUDIT OF CASH AND CASH TRANSACTIONS Estimated Time: 6.0 HOURS 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 1. Why is it difficult to detect the withholding of cash receipts? 2. Identify three ways an employee might misappropriate cash receipts. Discussion questions 2-3 Substantive audit procedures on cash and cash equivalents For each financial statement assertion listed below, identify the appropriate audit substantive audit procedures. 1. All cash received is recorded (Lapping is not occurring). 2. Cash recorded as received was actually received. 3. Cash is not counted twice by using float. Discussion questions 2-4 1. During the first few months of the year, Alger Tang, the cashier in a small company, was engaged in lapping operations. However, he was able to restore the amount of cash “borrowed” by March 31, and he refrained from any fraudulent acts after that date. Will the year-end audit probably lead to the discovery of his lapping activities? Explain. 2. Although the primary objective of an independent audit is not the discovery of fraud, the auditors in their work on cash take into consideration the high relative risk associated with this asset. One evidence of this attitude is evidence by the CPA’s alertness for signs of lapping. Required: (a) Define lapping; (b) Explain the audit procedures that CPAs must utilize to uncover lapping. Problem 2-1 Analysis and classification of cash balances The cash and cash equivalents account in the ledger of Aeson Company had a balance of P5,935,000 at December 31, 2014. An examination of the account, however, disclosed the following. Auditing Practice I Workbook Third Term, AY 2014-2015 Page 2-1 This amount includes unreplenished vouchers totalling P 7.000 200.000 Audit Notes: A. The company expects to recover only P0. 2014. 2015 Change fund Credit memo from a vendor for a purchase return Travellers’ check Customer’s check returned by the bank marked “DAIF” Money order Petty cash fund (Note B) Treasury note.000. due 2/28/15 (Note C) Treasury bills.000 300.000 as of December 31. place an X in the column indicating the correct classification for balance sheet purposes. the end of the company’s fiscal year. due 1/31/15 (Note D) Cash Sinking Fund Preferred redemption fund 2.000 1. 2014. The following fund composition was arrived at: Currency P972 Unreplenished vouchers: Supplies 388 Transportation 240 Auditing Practice I Workbook Third Term.000.000 50.000 400. due November 30. B.000 200.000 15. Cash Cash Equivalent ST Investment Other Checking account Savings account Rare coins kept for long-term speculation Postdated checks received Money orders received Petty cash fund Treasury bills purchased when two months remain in the term Compensating balance for a short-term loan Sinking fund to retire a bond in five years Certificate of deposit (six-month term) Short-term investment in marketable equity securities Problem 2-3 Cash fund count The auditor for Gennie Company examined the office cash working fund immediately after the close of the business June 30. AY 2014-2015 Page 2-2 . D.000 (100.Current account at May Bank Current account at DBP Payroll Account Savings Account in Rural Bank (Note A) Treasury warrants Treasury note. This is a 180-day treasury bill acquired on July 31.60 for every peso deposited.000 500.000) 500.000 30. 2014.000 10. 2014 balance sheet? Problem 2-2 Analysis and classification of cash balances For each of the items listed in the table below. 2014. Required: How much should Aeson Company report as cash and cash equivalent on its December 31.000 10. Rural bank was closed two years ago. C. This is a two-year treasury note acquired on December 31.000 20.000 800. 3. Currency – Details omitted Unreplenished petty cash vouchers Voucher Date 11/20/2014 12/04/2014 12/12/2014 12/15/2014 Advances – all properly approved Total amount counted Accountability: Petty cash fund Undeposited collections Shortage Auditing Practice I Workbook P4. 2. 3. together with their contributions (total P500) for a gift to a departing employee. 2014. 2014. 2014. All unreplenished vouchers are dated prior June 30.900 Third Term.900 150 . Case 3 1. 2014. Assuming that all information given in case 1 is the same except that the contribution to the departing employee is not attached to the sheet of paper. What is the balance of the cash working fund as of June 30.750 5. Prepare the adjusting journal entries. Prepare the adjusting journal entries. 2014.000. Problem 2-4 Cash fund count The following cash count sheet and additional information pertain to the accounts of HERMINIA Corporation for the year ended December 31. Case 2 1.000 4. what would be the amount of cash shortage or overage? 2. Attached to the paper is currency of 500 The cash working fund has an imprest balance of P4. 2014 and the repairs and advances to employees were dated July 2 and 3. Cash Count Date: December 16.100 A check prepared by an employee payable to Gennie 230 A sheet of paper bearing the signatures of several employees. 2014. What is the balance of the cash working fund as of June 30.800 Explanation Postage stamps Repair of typewriter Transportation – Messenger Office Supplies Amount 100 150 60 90 1. What is the balance of the cash working fund as of June 30. 3. respectively. REQUIRED: Case 1 1. Adjusting journal entries on June 30. cash custodian 1. 2014. what would be the amount of cash shortage or overage? 2. 2014. Based on the information above. Assuming that the count was performed on July 5. compute the amount of cash shortage or overage.Repairs 170 Advances to employee 400 Check drawn by Gennie payable to Philip. AY 2014-2015 Page 2-3 400 500 5. all in cash.000 2008 December 31 5. Hairdresser Mec.100 2009 January 2 3. salesman 100 The balance of the Petty Cash account. Problem 2-5 Cash fund count (Working Paper Preparation) You are examining the accounts of Tang Beauty Salon.000 6.00 0.Additional information: 1. 2014 covering the period from December 1 to 14. The face of the envelope bore the notation “unclaimed”. employee P50 December 23 Brian. customer Amount P5. 2015. 2. Found inside the cash box were two pay envelopes which had been opened and the contents aggregating P240 removed.500 P80 Nature Transportation Office supplies Photocopy fees Postage Newspaper Freight charges Amount P65 70 80 150 10 50 IOUs: Date Maker Amount December 20 Brixen. 2014. no checks) Invoice No. in the presence of Alloy Paril. AY 2014-2015 Page 2-4 . revealed: Quantity Coins Bills Checks: Date December 27 December 30 December 30 Payee Cash Tang Beauty Salon Tang Beauty Salon Unused stamps: Vouchers: Date December 15 December 16 December 17 December 28 January 2 January 2 Denomination 32 40 4 3 10 15 P1. The last replenishment of the fund was made on December 14. Beautician Rachel. Date Amount 2007 December 30 P4.25 500 100 20 10 Maker Alger.000. December 31. petty cashier. Auditing Practice I Workbook Third Term.050 REQUIRED: Prepare an audit cash count sheet. was P 5. Your count of the imprest cash fund. 2014. Sales invoices (for cash sales. on January 2. REQUIRED: Compute the amount of cash shortage.100 6.m. made at 9:00 a. 028 24. and service fees of P10. What is the correct total debit in the reconciliation for the bank side on June 30. Me-ann company’s cash ledger on June 30.040 1973 720 1974 816 1975 692 The cashier prepared the following reconciliation: Balance per bank statement P27.000 which included the NSF checks in letter II above. A credit of P 500 for a note collected by the bank does not appear on the company’s records. A check of P90. What is the amount of the shortage? 2. 2014? 4. The bank statement balance is P 27.000 is issued by Charlene company was recorded in its books as P120. determine the following: 1.700 Required: 1.000. 2014. Total debits in the bank statement for June amounted to P398. 2014? 2. Sandy Company’s check of P15.000. Required: Based on the results of your audit. AY 2014-2015 Page 2-5 . Outstanding checks amounted to P29.000 which include total deposits of P490. you found the following data concerning the cash position as of June 30.700. II. 2014? Problem 2-7 Manipulated bank reconciliation The Lising Company did not exercise adequate internal control over its cash transactions. How did the cashier attempt to conceal the shortage? Auditing Practice I Workbook Third Term. IV.000. The services were recorded in the company’s books in the succeeding month. What is the adjusted cash balance on June 30. 1975 692 2. What is the net adjustment on the Company’s cash records on June 30. 2014 P34. On the company’s records the balance of cash on hand and in bank was P 34. 2014? 3. 1974 816 No. During an audit.000 Deduct: Outstanding checks: No.000 which include total deposits of P490.000.000. NSF checks of P56. 2014 showed a balance of P936.000 had been returned by the bank and were not yet reflected in the books of the company.Problem 2-6 Auditing a client’s bank reconciliation Me-ann company’s cash ledger on June 30.228 Collected note 500 9. 2014 showed a balance of P936. What is the cash balance per bank statement on June 30. June 30. 1973 P720 No. V. III.000.728 Cash per company records.972 Add: Cash on hand (this count is correct) 9.000 while deposit in transit totalled P98. Outstanding checks are as follows: Number Amount 1972 P1.000 was charged by the bank to Charlene company’s account. Your audit of the cash account revealed the following: I. 2014. Supplier's unpaid invoices for merchandise amounted to P60. 20114 deposited on January 3.000 12/31/2014 P3. November. not shown on the Company books Tapes for bank and company cash data offer the following totals: Deposit and credit memos per bank statement Cancelled checks and debit memos per bank statement Cash receipts per cash book Cash disbursement.000. Additional data: 1.000 cash.140 P 8. and bank balance for December.350 600 1.000 of this loan was paid by check in December.500 40 300 6. The balance.500 were issued by the company in December.800 P10. Operating expenses paid during the period amounted to P180. 2014. You were told by the cashier that P5. 6. disbursements.000 REQUIRED: Prepare a reconciliation of receipts. The bank statement in December. not shown on the company books Collections by bank from ERNEL Company customers. 2014 with KEAN investing P 150. while merchandise purchases amounted to P250.000.300 10 200 5. in checks. AY 2014-2015 Page 2-6 . 3.500. Inquiry from the cashier disclosed that the amount represents proceeds of a 90-day. The gross profit rate is 50%. Examination of the paid checks disclosed that checks totalling P4. represents petty cash fund. you gathered the following information: KEAN ENTERPRISES started operation on October 2. checks. discounted bank note.000. Monthly bank reconciliation statements have not been prepared. Merchandise inventory at December 31. Auditing Practice I Workbook Third Term.S. however. REQUIRED: Compute the cash shortage at December 31. 2015. 5. Problem 2-9 Proof of Cash Data for the JAY-ANN COMPANY are assembled as follows: Cash account balance Bank statement balance Deposit in transit Checks outstanding Bank service charges for month. The bank statement in October showed a bank credit for P98. 2015. 2014 amounted to P30. and December were made available to you. 4.000 of these. and were presented for payment only in January. were cash sales on December 29.000. in currency and coins. 2014 showed an ending balance of P30.F. not shown on the company books Bank charges for N. per cash book 11/31/2014 P1.500.000 P10. 2. 2014. 2014. P80. Accounts receivable subsidiary ledgers had a total balance of P70. bank statements for October.000 P13.Problem 2-8 Bank reconciliation You are engaged to audit the books of KEAN ENTERPRISES.690 400 1. 2014. From the records of the company. Cash count of the cashier's accountability amounted to P8.000 at December 31.790 10. dated October 2.000.000 6. 500 was deposited in the bank on July 1. The check was redeposited by the client in the bank on July 1.140 40 P32. you were informed that it has been lost and that the client is too busy at this time to prepare another.100 .800 (EC) 100 E . AY 2014-2015 Page 2-7 P28.000 P32.600 Book Balance Plus proceeds of notes receivable collected by the 500 bank in May 33.Problem 2-10 Proof of cash You have been instructed by your supervisor on an audit of GPB Company to prepare a four-column proof of cash receipts and disbursements for the month of June. May 31 Total Less Outstanding Checks 140 152 153 Adjusted Bank Balance P500 400 100 1. Auditing Practice I Workbook Third Term.100 Plus deposit made in bank on May 31 not recorded on books until June Total Less May bank service charges Plus Undeposited Collections.Error DM – Debit Memo The Debit memo on June 30 represents customer NSF check returned by the bank. The bank reconciliation statement prepared by the client in May is reproduced below: May 2014 Reconciliation Bank Balance P32. The June bank statement is reproduced below: Bank of the Philippine Island Account Name: Robert Company Date Disbursements June 1 400 June 7 100 June 10 700 June 15 200 June 20 600 June 27 900 June 29 (E) 100 June 30 (SC) 10 June 30 (DM) 150 SC – Service Charges EC – Error Corrected Receipts 500 1.100 Adjusted Book Balance Upon inquiry about the client’s June 30 bank reconciliation.540 3. Cash received for the period June 21 through June 30 of P 3.500 100 32. 2014. Your supervisor tells you to get the June bank statement and paid checks and to prepare the June 30 reconciliation so that you may complete the June proof of cash.000 2. b. 2 Dec. 157 No. 2014. 123 223 323 423 Auditing Practice I Workbook Disbursement Recorded Paid by In books Bank 12/31/14 01/04/15 01/04/15 01/05/15 12/31/14 01/05/15 01/04/15 01/11/15 Receipt Recorded Paid by In books Bank 12/31/14 12/31/14 12/31/14 12/31/14 12/31/14 01/04/15 01/04/15 01/04/15 Third Term. 2014. 158 P400 P100 P700 P200 P600 P900 The check register revealed that the last check in June was No. 30 Jan. 154 No. 156 was for P130. 30 Jan. 101 202 303 404 From BDO PNB BPI RCBC To BPI RCBC HSBC BOC Disbursement Date Per Books Per Bank Dec. Problem 2-11 Interbank transfers schedule The information below was taken from the bank transfer schedule prepared during the audit of INDAY Co. Unadjusted Book Receipts in June 30. 2014. 2 Jan. 31 Jan. Check No. Unadjusted book balance as of June 30. 2 Jan. 2 Dec. 152 No. 2 Receipt Date Per Books Per Bank Dec. Assume all checks are dated and issued on December 30. Unadjusted Book Disbursements in June 30. 2 Jan. 2014. 155 No. 4 Jan. 3 Jan. 31 Jan. 31 Which of the above checks might indicate kiting? Problem 2-12 Interbank transfers schedule Which of the following cash transfers results in a misstatement of cash at December 31. 2014? Check No. REQUIRED: a. AY 2014-2015 Page 2-8 . 159 for P250 and that Check no.The paid checks accompanying this bank statement (all clearing in June) were: No. 3 Jan. 3 Dec.’s financial statements for the year ended December 31. 2014. 153 No. c. 30 Dec.