Audit Of Cash Problem No.1: Auditing Problems

CPA REVIEW SCHOOL OF THE PHILIPPINES Manila

AUDITING PROBLEMS

AP-8708 CPA Review

AUDIT OF CASH PROBLEM NO.1 The bank statement for the checking account of MSU, INC. showed a December 31, 2020, balance of P1,463,212. Information that might be useful in preparing a bank reconciliation is as follows: a) Outstanding checks were P132,025. b) The December 31, 2020, cash receipts of P57,500 were not deposited in the bank until January 2, 2021. c) One check written in payment of rent for P24,600 was correctly recorded by the bank but was recorded by MSU as P26,400 disbursement. d) In accordance with prior authorization, the bank withdrew P45,000 directly from the checking account as payment on a mortgage note payable. The interest portion of that payment was P35,000. MSU has made no entry to record the automatic payment. e) Bank service charges of P1,400 were listed on the bank statement. f) A deposit of P87,500 was recorded by the bank on December 13, but it did not belong to MSU. The deposit should have been made to the checking account of SUM, Inc. g) The bank statement included a charge of P8,500 for an NSF check. The check was returned with the bank statement and the company will seek payment from the customer. h) MSU maintains a P20,000 petty cash fund that was appropriately reimbursed at the end of December. i)

According to instruction for MSU on December 30, the bank withdrew P1,000,000 from the account and purchased Treasury Bills for MSU. MSU recorded the transaction in its books on December 31 when it received notice from the bank. Half of the treasury bills mature in two months and the other half in six months.

Questions: 1. What is the cash in bank balance per books on December 31, 2020? A. P1,354,287 B. P1,357,887 C. P1,337,287

D. P1,264,287

2. What is the corrected cash in bank balance on December 31, 2020? A. P1,304,787 B. P1,301,187 C. P1,284,187

D. P1,211,187

3. What amount of cash and cash equivalents should be reported in the current asset section of the balance sheet on December 31, 2020? A. P1,821,187 B. P2,321,187 C. P1,301,187 D. P1,874,287 -----------------------------oooOOOooo-----------------------------

PROBLEM NO. 2 From the following information, prepare the following: 1. A four-column reconciliation that would end at adjusted balances. Page 1 of 9 Pages

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AP8708 – AUDIT OF CASH

2. Adjusting journal entries as of December 31, 2020. Reconciling items: November 30 Deposits in transit P10,400 Outstanding checks 16,014 NSF checks 1,052 Customers’ notes collected by bank 3,000 Bank service charges 100 Erroneous bank debits 1,200 Erroneous bank credits 2,000 Book balances Bank balances

December 31 ? ? P1,400 8,554 130 1,800 6,000

? 261,120

332,472 ?

December transactions: Books Bank Receipts P302,460 P299,902 Disbursements 222,846 220,196 -----------------------------oooOOOooo-----------------------------

PROBLEM NO. 3 The cash account of NUNAL COMPANY shows the following activities: Date Nov. 30 Dec. 2 4 15 20 21 31 31

Date Dec. 1 2 3 4 5 8 9 10 11 12 15 16 17 18 19 22 23 23 23 26 28 28 29 29 29

Debit Balance November bank charges November bank credit for notes receivable collected P 30,000 NSF check Loan proceeds 145,500 December bank charges Cash receipts book 2,121,900 Cash disbursements book CASH BOOKS RECEIPTS OR No. 110-120 121-136 137-150 151-165 166-190 191-210 211-232 233-250 251-275 276-300 301-309 310-350 351-390 391-420 421-480 481-500 501-525 526-555 556-611 612-630 -

Amount P 33,000 63,900 60,000 168,000 117,000 198,000 264,000 231,000 63,000 90,000 165,000 24,000 57,000 27,000 51,000 63,000 96,000 222,000 15,000 114,000 -

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Credit P

150 3,900 180

1,224,000

Balance P345,000 344,850 374,850 370,950 516,450 516,270 2,638,170 1,414,170

PAYMENTS Check No. 801 802 803 804 805 806 807 808 809 810 811 812 813 814 816 817 818 819 820 821 822 823 824 825 826

Amount P 6,000 9,000 3,000 9,000 36,000 57,000 78,000 90,000 183,000 21,000 24,000 48,000 60,000 66,000 108,000 33,000 150,000 21,000 12,000 9,000 36,000 39,000 87,000 6,000 33,000

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Totals Date Dec. 1 2 3 4 5 8 9 10 11 12 15 16 17 18 19 22 23 23 23 26 28 28 29 29 29 Totals

AP8708 – AUDIT OF CASH

P2,121,900 BANK STATEMENT Check 792 802 804 EC 805 CM 16 799 DM 57 808 803 809 DM 61 813 CM 20 815 816 811 801 814 818 DM 112 821 CM 36 820

Charges P 7,500 9,000 9,000 243,000 36,000 21,150 3.900 90,000 3,000 183,000 180 60,000 18,000 108,000 24,000 6,000 66,000 150,000 360 9,000 12,000 P1,059,090

P1,224,000 Credits P 25,500 33,000 63,900 60,000 243,000 285,000 36,000 462,000 231,000 63,000 255,000 24,000 57,000 145,500 141,000 96,000 222,000 15,000 36,000 P2,493,900

Additional information: 1. 2. 3. 4. 5. 6. 7.

DMs 61 and 112 are for service charges. EC is error corrected. DM 57 is for an NSF check. CM 20 is for loan proceeds, net of P450 interest charges for 90 days. CM 16 is for the correction of an erroneous November bank charge. CM 36 is for customers’ notes collected by bank in December. Bank balance on December 31 is P1,776,810

Based on the preceding information, determine the following: 1. Outstanding checks at December 31 A. P459,000 B. P477,000

C. P441,000

D. P487,650

2. Deposit in transit at December 31 A. P114,000 B. P139,500

C. P132,000

D. P 0

3. Adjusted bank receipts for the month of December A. P2,297,400 B. P2,291,400 C. P2,303,400

D. P2,321,400

4. Adjusted book disbursements for the month of December A. P1,228,440 B. P1,246,440 C. P1,210,440

D. P1,246,620

5. Adjusted bank balance at December 31 A. P1,449,810 B. P1,674,810 C. P1,431,810 D. P1,776,810 -----------------------------oooOOOooo-----------------------------

PROBLEM NO. 4

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AP8708 – AUDIT OF CASH

The following information was obtained in connection with the audit of SOLEDAD COMPANY’s cash account as of December 31, 2020. Outstanding checks, 11/30/20 P48,750 Outstanding checks, 12/31/20 37,500 Deposit in transit, 11/30/20 37,500 Cash balance per general ledger 12/31/20 112,500 Actual company collections from its customers during December 457,500 Company checks paid by bank in December 390,000 Bank service charges recorded on company books in December 7,500 Bank service charges per December bank statement 9,750 Deposits credited by bank during December 435,000 November bank service charges recorded on company books in December 4,500 The cash receipts book of December is underfooted by P7,500. The bank erroneously charged the company’s account for a P11,250 check of another depositor. This bank error was corrected in January 2021. Questions: 1. How much is the deposit in transit on December 31, 2020? A. P15,000 B. P67,500 C. P52,500

D. P60,000

2. The total unrecorded bank service charges as of December 31, 2020, is A. P6,750 B. P2,250 C. P5,250 D. P12,750 3. What is the total book receipts in December? A. P457,500 B. P465,000

C. P450,000

D. P442,500

4. What is the total amount of company checks issued in December? A. P390,000 B. P378,750 C. P369,000

D. P401,250

5. What is the total book disbursements in December? A. P386,250 B. P371,250 C. P385,500

D. P378,750

6. What is the book balance on November 30, 2020? A. P63,750 B. P48,750 C. P112,500

D. P105,000

7. What is the bank balance on November 30, 2020? A. P55,500 B. P69,000 C. P130,500

D. P48,750

8. What is the total bank receipts in December? A. P360,000 B. P420,000

C. P435,000

D. P450,000

9. What is the total bank disbursements in December? A. P411,000 B. P463,500 C. P397,500

D. P388,500

10. What is the bank balance on December 31, 2020? A. P64,500 B. P93,000 C. P99,750 D. P79,500 -----------------------------oooOOOooo-----------------------------

PROBLEM NO. 5 The auditor for RAKI-RAKI, INC. examined the petty cash fund immediately after the close of business, June 30, 2020, the end of the company’s fiscal year. The following fund composition was arrived at: Currency Fund vouchers: Office supplies expense Travel expense Office equipment repairs

P1,272 388 240 170

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AP8708 – AUDIT OF CASH

Loans to officers and employees A check drawn by Raki-Raki, Inc., payable to the order of Jingle, fund custodian An employee’s check, returned by bank, stamped NSF A sheet of paper bearing the signatures of several employees, together with their contributions (total P200) for a gift for a departing employee. Attached to the paper is currency of

400 1,100 230 200 P4,000

The petty cash fund general ledger account has an imprest balance of P4,000.

Required: 1. What audit adjustment should be prepared as of June 30, 2020? 2. At what amount should the cash fund be shown in the balance sheet as of June 30, 2020? -----------------------------oooOOOooo-----------------------------

PROBLEM NO. 6 You have been asked by the proprietor of the SANDOVAL CO. to verify the accountability of the cashier-bookkeeper, who was allowed to take a vacation leave a few days ago. A. The bank reconciliation statements prepared by the cashier-bookkeeper are presented below:

November 30, 2020 Balance per bank statement Cash on hand Total Outstanding checks: No. 2520 2521 2522 Erroneous bank charge Erroneous bank credit Book balance

P21,500 500 22,000 P 2,000 1,400 1,900

(3,300) 2,000 (500) P20,200

December 31, 2020 Balance per bank statement Cash on hand Total Outstanding checks: No. 2674 2675 2676 Erroneous bank charge Erroneous bank credit Book balance

P 135,000 6,300 141,300 P31,000 10,300 5,000

(41,300) 3,000 (600) P102,400

B. The Cash in Bank account in the general ledger shows the following debits and credits during December: Cash in Bank Dec. 1 Balance 2 Received 7 Received 12 Received 17 Received 23 Received 27 Received 31 Received

from from from from from from from

P20,200 customers 4,500 customers 5,000 customers 20,000 customers 30,000 customers 9,000 customers 70,000 customers 48,500

Dec. 1 Checks 5 Checks 14 Checks 24 Checks 28 Checks

issued P2,000 issued 5,200 issued 31,000 issued 46,000 issued 7,600

31 Balance Page 5 of 9 Pages

102,400

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Total

AP8708 – AUDIT OF CASH

P198,200

Total

P198,200

C. The following summarized transactions were taken from the bank statement for the month of December 2020: Balance, December 1, 2020

P16,500

Total deposits

P173,700

The total deposits per bank statement include: a. Collection of notes receivable b. Correction of November erroneous bank charge c. December 10 deposit of Lava, Inc. credited in error to SANDOVAL Total

P5,000 2,000 600 P7,600

Total checks

P65,200

The total checks per bank statement include: a. Correction of November erroneous bank credit b. December check of Nile Co. charged in error to SANDOVAL Total

P 500 3,000 P3,500

D. Cash on hand per count in the morning of January 2, 2021, amounted to P6,300. E. Before leaving his company for a one-week vacation, the proprietor had left several signed blank checks that the cashier-bookkeeper had cashed for his personal use. Questions: 1. What is the adjusted cash balance on November 30, 2020? A. P16,500 B. P13,200 C. P20,200

D. P14,500

2. The amount of unaccounted receipts in December is A. P11,000 B. P13,200 C. P9,000

D. P15,100

3. The amount of unrecorded/unsupported disbursements in December is A. P15,100 B. P10,900 C. P7,000 D. P5,000 4. What is the total cash shortage as of December 31, 2020? A. P26,000 B. P15,100 C. P33,000

D. P7,000

5. What is the adjusted cash balance on December 31, 2020? A. P102,400 B. P125,000 C. P87,400

D. P111,400

-----------------------------oooOOOooo-----------------------------

PROBLEM NO. 7 On January 10, 2021, you started the audit of the financial records of the KEMIRARA COMPANY for the year ended December 31, 2020. From your investigation, you discovered the following: 1. The bookkeeper acts also as the cashier. reconciliation contained the following items:

Her December 31, 2020, year-end cash

Cash per ledger, Dec. 31, 2020 Cash per bank, Dec. 31, 2020 Checks outstanding Amnesia Co. check charged by the bank in error Dec. 20, 2020; corrected by the bank on Jan. 5, 2021 Cash in transit, credited by the bank on Jan. 2, 2021

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P184,200 194,550 15,660 450 2,160

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AP8708 – AUDIT OF CASH

2. The cash account balances per ledger as of December 31, 2020 were: Cash P184,200 Petty cash 450 3. The count of the cash on hand at the close of the business on January 10, 2021, including the petty cash, was as follows: Currency and coins Expense vouchers Employees’ IOU’s dated Jan. 5, 2021 Customers’ checks in payment of account

P1,155 60 165 870

4. From January 2, 2021 to January 10, 2021, the date of your cash count, total cash receipts appearing in the cash records were P25,800. According to the bank statement for the period from January 2, 2021 to January 10, 2021, total deposits were P22,800. 5. On July 5, 2020, cash of P1,200 was received on account from a customer; the Allowance for Doubtful Accounts was charged and Accounts Receivable was credited. 6. On December 5, 2020, cash of P900 was received on account from a customer; Inventory was charged and Accounts Receivable was credited. 7. Cash of P2,190 received during 2020 was not recorded. 8. Checks received from customers from January 2, 2021 to January 10, 2021, totaling P1,260, were not recorded but were deposited in the bank. 9. On July 1, 2020, the bank refunded interest of P60 because a note of the Kemirara Company was paid before maturity. No entry was made for the refund. 10. In the cashier’s petty cash, there were receipts for collection from the customers on January 9, 2021, totaling P2,550; these were unrecorded and undeposited. 11. In the outstanding checks, there is one for P150 made payable to a trade creditor; investigation shows that this check had been returned by the creditor on November 14, 2020 and a new check for P300 was issued in its place; the original check for P150 was made in error as to amount. Required: 1. Compute the correct bank balance as of December 31, 2020. 2. Compute the cash shortage as of December 31, 2020. 3. Compute the cash shortage for the period January 1, 2021 to January 10, 2021.

PROBLEM NO. 8 Select the best answer for each of the following: 1. As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After the client’s treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this audit procedure? A. The confirmation request was signed by the treasurer. B. Sending the request was meaningless because the account was closed before yearend. C. The request was mailed by the assistant treasurer. D. The CPA did not sign the confirmation request before it was mailed. 2. On receiving the bank cutoff statement, the auditor should trace A. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts journal. Page 7 of 9 Pages

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AP8708 – AUDIT OF CASH

B. Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation. C. Deposits listed on the cutoff bank statement to deposits in the cash receipts journal. D. Checks dated subsequent to year-end to the outstanding checks listed on the year-end bank reconciliation. 3. An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when 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. 4. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except A. Cutoff bank statement B. Year-end bank statement C. Bank confirmation D. General ledger 5. An auditor compares information on cancelled checks with information contained in the cash disbursements journal. The objective of this test is to determine that A. Recorded cash disbursement transactions are properly authorized. B. Proper cash purchase discounts have been recorded. C. Cash disbursements are for goods and services actually received. D. No discrepancies exist between the data on the checks and the data in the journal. 6. When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent A. Theft C. Substitution B. Irregular endorsement D. Deposit in transit 7. If the balance shown on an entity’s bank statement is less than the correct cash balance and neither the entity nor the bank has made any errors, there must be A. Deposits credited by the bank but not yet recorded by the entity. B. Outstanding checks. C. Deposits in transit. D. Bank charges not yet recorded by the entity. 8. If the cash balance shown on an entity’s accounting records is less than the correct cash balance and neither the entity nor the bank has made any errors, there must be A. Deposits credited by the bank but not yet recorded by the entity. B. Deposits in transit. C. Outstanding checks. D. Bank charges not yet recorded by the entity. 9. The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may A. Not believe that the bank is obligated to verify confidential information to a third party. B. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation. C. Not have access to the client’s cutoff bank statement. D. Be unaware of all the financial relationships that the bank has with the client. 10. The best evidence regarding year-end bank balances is documented in the A. Cutoff bank statement. B. Bank reconciliations. C. Interbank transfer schedule.

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AP8708 – AUDIT OF CASH

D. Bank deposit lead schedule. --- END ---

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