APPLIED AUDITING

Cash
PROBLEM 1:

1. Which of the following is not a universal rule for achieving strong internal control over
cash?
a. Separate the cash handling function and record keeping functions.
b. Decentralize the receiving of cash as much as possible.
c. Deposit each days’ cash receipts by the end of the day.
d. Have bank reconciliation performed by employees independent with respect to
handling cash.

2. Which of the following controls most likely would reduce the risk of diversion of customer
receipts by an entity’s employees?
a. Daily deposit of cash receipts.
b. Monthly bank reconciliations.
c. Prenumbered remmitance advice
d. A bank lockbox system

3. Which of the following cash fraud activities involves the postponement of the recording of
receipts and can be well perpetrated where there is lack of segregation of duties between
recordkeeping and custodial functions?
a. Kiting
b. Lapping
c. Window dressing
d. Salami fraud

4. 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 uncollectible accounts are authorized to be written off with the dates the
write-offs are actually recorded.
b. Individual bank deposits slips with the details of the monthly bank statements.
c. Daily cash summaries with the sums of the cash receipts journal entries.
d. Dates checks are deposited per bank statements with the dates remittance
credits are recorded.

5. Which of the following characteristics most likely would be indicative of check kiting?
a. High turnover of employees who have access to cash.
b. Many large checks that are recorded on Mondays.
c. Frequent ATM checking account withdrawals.
d. Low average balance compared to high level deposits.

6. Which of the following audit procedures will likely detect or uncover kiting activities of the
client?
a. Sending confirmation to banks.
b. Vouch check issuances representing disbursements to source documents.
c. Render cash count on a surprise basis.
d. Simultaneously validate bank reconciliations statements.
7. Sound internal control dictates that, immediately upon receiving checks from customers by
mail, a responsible employee should:
a. Add the checks to the daily cash summary.
b. Verify that each check is supported by a prenumbered sales invoice.
c. Record the checks in the cash receipts journal.
d. Restrictively endorse the check collections and prepare a duplicate listing of
checks received.

8. Checks from customers are received in the company mailroom each day. Which of the
following controls should be in place to safeguard them?
a. Establish a separate post office box for customer payments.
b. Forward all checks to the cashier upon receipt.
c. Provide bonding protection for mail clerks.
d. Require specific mail clerk to list and restrictively endorse each check.

9. For the most effective internal control, monthly bank statements should be received directly
from the banks and reviewed by the
a. Controller.
b. Cash receipts accountant.
c. Cash disbursement accountant.
d. Internal auditor.

10. As payments are received, one mailroom employee is assigned the responsibility of prelisting
receipts and preparing the deposit slip prior to forwarding the receipts, the deposit slip, and
the remittance advices to accounts receivable for posting. Accounts receivable personnel
refoot the deposit slip, stamp a restrictive endorsement on the back of each check, and then
forward the receipts and the deposit slip to the treasury department. Which of the following
is a reasonable assessment of internal control on this process?
a. Internal control is adequate.
b. Internal control is inadequate because mailroom employees should not have
access to cash.
c. Internal control is inadequate because treasury employees should prepare the
deposit slip.
d. Internal control is inadequate because of a lack of segregation of duties.

11. Which of the following is a standard internal accounting control for cash disbursements?
a. Checks should be signed by the controller and at least one other employee of
the company.
b. Checks should be sequentially numbered and the numerical sequence should
be accounted for by the person preparing the bank reconciliation statement.
c. Checks and supporting documents should be marked “paid” immediately after
the check is returned with the bank statement.
d. Checks should be sent directly to the payee by the employee who prepares
documents that authorize check preparation.

12. Which of the following observations, made during the preliminary survey of a local
department store’s disbursement cycle, reflects a control strength?
a. Individual department managers use prenumbered forms to order
merchandise from vendors.
b. The receiving department is given a copy of the purchase order complete with
description of goods, quantity ordered, and extended price for all merchandise
ordered.
c. The treasurer’s office prepares checks for suppliers based on vouchers
prepared by accounts payable department.
d. Individual department managers are responsible for the movement of
merchandise from the receiving dock to storage or sales areas as appropriate.

13. To provide assurance that each voucher is submitted and paid only once, an auditor most
likely would examine sample of paid vouchers and determine whether each voucher is:
 a. Supported by a vendor’s invoice.
b. Stamped “paid” by check signer.
c. Prenumbered and accounted for.
d. Approved for authorized purchases.

14. Which of the following assertions does the auditor most likely would like to validate in
deciding to render cash counts?
a. Completeness
b. Existence
c. Valuation
d. Rights and obligation

15. In rendering cash counts, the accountability shall represent:

a. The cash items only.
b. Cash items and other evidences of the use of cash such as unreplenished paid
vouchers.
c. Cash that should be on hand per collection activities of the custodian.
d. The difference between the cash balance per collection records against the
valid cash items and evidences supporting the use of cash.

16. In rendering cash counts, cash shortage results when:

a. Accountability is equal to cash items.
b. Accountability is higher than cash items.
c. Accountability is lower than cash items.
d. Accountability is zero.

17. On receiving a client’s bank cutoff statement, an auditor most likely trace
a. Deposits recorded in the cash receipt journal after year-end to the cut-off
statement.
b. Checks dated after year-end listed in the cutoff statement to the year-end
outstanding checklist.
c. Deposits in transit listed in the cutoff statement to the year-end bank
reconciliation.
d. Prior-year checks listed in the cut-off statement to the year-end outstanding
checklist.

18. 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 parity.
b. Sign an 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.

19. Which of the following audit procedures would be used to verify the payment of note in
July?
a. Check the mathematical accuracy of the July 31, reconciliation.
b. Check for absence of note on July 31, bank confirmation.
c. Trace payment to duplicate deposit slip.
d. Obtain cutoff bank statement.

20. The auditor would perform the following procedures to verify the unrecorded disbursement
check, except:
a. Obtain cutoff bank statement.
 b. Examine checks returned with the July bank statement.
c. Trace check number to absence in the July cash disbursement journal and
recording in August.
d. Examine supporting documentation.

21. In validating bank reconciliation statements of the client, the auditor should trace back
outstanding checks to the:
a. Accounts payable voucher.
b. Cancelled checks returned by the bank.
c. Bank statement of the current month.
d. Cut-off bank statement of the subsequent month.

22. In validating the bank reconciliation statements of the client, the auditor should trace back
the unrecorded debits, like service charges to the:
a. Accounts payable voucher.
b. Cancelled checks returned by the bank.
c. Bank statement of the current month.
d. Cut-off bank statement of the subsequent month.

23. In preparing the bank reconciliation statement of the client, a cash in bank shortage
normally occurs when:
a. The unadjusted balance per bank is lower than the unadjusted balance per
books.
b. The adjusted balance per bank is higher than the unadjusted balance per
books.
c. The unadjusted balance per bank is higher than the unadjusted balance per
books.
d. The adjusted balance per bank is lower than the adjusted balance per books.

24. The proof of cash statements is usually prepared by the auditor when:
a. Internal control over cash is strong and control risk is placed at the maximum.
b. Internal control over cash is weak and control risk is place at the maximum.
c. Cash balance is very significant.
d. Cash balance is very insignificant.

PROBLEM 2:
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 P3,250,000

Savings account at Rural Bank 2,750,000
Current account at BDO (240,000)
Undeposited collections on hand 1,278,000
Travel fund 50,000
Interest and Dividend fund 120,000
Payroll fund 400,000
Pension fund 250,000
Change fund 25,000
Bond Sinking fund 500,000
Petty cash fund, imprest balance 30,000
Cash in closed bank 300,000
Postage stamps 3,000
IOU from a key officer 30,000
Credit memo from a vendor for a purchase return 60,000
Investment in debt securities, due 3/31/19 (purchased 12/31/18) 600,000
Investment in debt securities, due 1/31/19 (purchased 1/1/18) 900,000
Investment in equity securities 1,000,000

Audit notes:
1. The current account at Metrobank included the recordings of the following:
a. P75,000 check to a supplier, in payment of an outstanding invoice dated
December 1, 2018. The check was issued as of December 30, 2018 but were
dated January 5, 2019.
b. P120,000 check to a supplier, in payment of another invoice dated December
20. The check which was dated December 30, 2018 was still on hand as of
December 31, 2018 and yet to be released to the payee.
c. P180,000 check to another supplier dated December 31 and released on the
same date for the payment of an invoice dated December 15.

2. The savings account at Rural bank included a P500,000 compensating balance related
to a 5 year, 12%, P5M bank loan dated January 1, 2016. The terms of the loan called
for the legal restriction on drawing from the said compensating balance at any time
during the five year term of the loan.

3. The undeposited checks, bank drafts and money orders included the following items:
a. P180,000 check from a customer dated 6/1/18.
b. P125,000 check from a customer dated 1/6/19.
c. P155,000 check from a customer dated 11/6/18, returned by the bank with
the November bank statement marked DAUD, yet to be redeposited.
d. P127,000 check from an employee dated 12/20/18.
e. P80,000 check from an officer dated 12/2/18 returned by the bank marked
NSF.
f. P150,000 postal money order.
g. P120,000 bank drafts.

4. On hand by the petty cash custodian on December 31, 2018 were:

• P7,000 worth of bills and coins
• P11,500 replenishment check
• P10,000 worth of unreplenished paid petty cash vouchers

5. All other cash funds were accounted for as equaling cash/securities on hand.
 6. The company made an estimate that only 50% from cash in closed bank shall be
recovered but the period of recovery is indefinite.

7. The investment in equity securities comprise of the following:

• P400,000 investment in ordinary shares acquired on 12/1/18 which are
intended for short term profit purposes. The company intends to sell the
same by 2/28/19
• P300,000 investment in ordinary shares acquired on 12/1/17 which the
client is intending to hold as available for sale.
• P300,000 investment in preference shares acquired on 12/1/18
redeemable at the option of the issuer by 2/28/19.

Requirements:
1. What is the adjusted Current account at Metrobank that should be presented as part of
Cash and cash equivalent?

2. How much from the Savings account with Rural Bank shall be presented as part of
Cash and cash equivalent?

3. How much from the Current account with BDO Bank shall be presented as part of Cash
and cash equivalent?

4. How much from the undeposited checks, money orders and bank drafts shall be
presented as part of Cash and cash equivalents?

5. How much is the adjusted petty cash fund?

6. How much from the total cash funds (including the adjusted petty cash fund) shall be
presented as part of Cash and cash equivalent in the Statement of Financial Position?

7. How much from the debt and equity securities shall be presented as part of cash and
cash equivalents?

8. What is the total cash and cash equivalent to be reported by the company in its
December 31, 2018 Statement of Financial Position?

9. How much in aggregate from the listed items shall be presented elsewhere as part of
current assets in the December 31, 2018 Statement of Financial Position?

10. How much in aggregate from the listed items shall be presented elsewhere as part of
non-current asset in the December 31, 2018 Statement of Financial Position?

11. How much in aggregate from the listed items shall be presented elsewhere as part of
current liabilities in the December 31, 2018 Statement of Financial Position?

PROBLEM 3:
A count of the Petty Cash Fund in the morning of January 3, 2019, of Manny Co. with an
imprest balance of P40,000 showed its composition as follows:

Bills and coins:

P1,000, 5 pieces
500, 10 pcs.
200, 5 pcs.
100, 10 pcs.
50, 10 pcs
20, 20 pcs
10, 25 pcs
5, 50 pcs
Unreplenished paid vouchers
12/29 Transportation P500
12/30 Office repairs 300
12/30 Officers’ meeting meals 900
12/30 Due to employees 1,000
1/2 Gasoline 1,000
Unreplenished unpaid vouchers
1/3 Transportation 800
1/3 Office supplies 1,500
Checks on hand
12/30 E. Dikong, employee 2,000
11/30 M. Dugas, employee, returned by the bank
marked NSF 1,000
12/27 Manny Co., payable to the custodian 10,000
Cash receipt voucher for a return of an expense advance 900

Requirements:
1. How much is the total accountability?

2. How much is the total shortage/overage if there are any?

3. What is the correct petty cash fund balance to be reported as of December 31, 2018?

4. Prepare a adjusting journal entry/ies to correct the petty cash fund balance as of
December 31, 2018.
 PROBLEM 4:

A count of the undeposited receipts under the custody of Mando Rugas, cashier of Makwarta
Company, on October 11, 2018, in relation to your audit of cash for the period ended
September 30, 2018, showed the following composition:

Currency and coins P12,310

Unused postage and documentary stamps 110

Checks:
Date Payee Drawer
3-24-14 Cash R. Zamora 1,000
9-30-14 Makwarta Co. Baguio Corp. 2,350
10-3-14 Makwarta Co. L. Reyes 1,960
10-3-14 MWSS Makwarta Co. 900
10-4-14 Makwarta Co. La. Union Corp. 1,590

Voucher paid out of receipts 1,500

Official Receipts 100801 – 100820 dated October 1 – 11, 2018 28,840

Other information:
a. The audited bank reconciliation for September showed deposits in-transit
totaling to P4,500 and a bank charge error amounting to P1,400. (all
collections as at September 30 has been deposited)

b. Total bank credits for the period October 1 to October 11, per the cut-off bank
statement requested to the bank amounted to P16,550.

Requirement:
What is the amount of shortage/overage on October 11, 2018?
 PROBLEM 5:

You are examining the accounts of BETTY Co. The balance of the Petty Cash account,
December 31, 2018 was P10,000; your count of the imprest fund, made at 9:00 am on
January 3, 2019, in the presence of A. Ang, petty cashier revealed the following:

Coins Bills
Quantity Denomination Quantity Denomination
76 P10 3 P1,000
124 5 2 500
50 1 2 100
112 .25 16 20
20 .10

Checks
Date Payee Maker Amount
Dec. 27 Betty Co. B Co., Customer P1,000*
30 Cash D. Dong, Vice President 1,220
30 Betty Co. Errol Corp., Customer 1,300
31 Beneco Betty Co. 2,000
Jan. 2 Cash Junior, Employee 312
2 Betty Co. R. Rarr, Customer 1,200
*returned by the bank together with December 31, 2018 bank statement marked NSF.

Unused Postage Stamps P100

Vouchers
Date Particulars Amount
Dec. 15 Transportation P130
16 Office supplies 140
17 Xerox fees 160
28 Postage 300
Jan. 2 Newspapers 20
2 Freight bill on merchandise purchases 100

IOUs
Date Particulars Amount
Dec. 20 T. Tiy – Employee P500
23 R. Ron – Salesman 200

Sales Invoices (for cash sales, all in cash no checks)

Invoice # 200889 Dec 29 P300
# 200890 Dec 30 340
# 200891 Dec 31 420
# 200901 Jan 2. 610

Required:
1. How much is the correct accountability as of January 2?

2. How much is the petty cash shortage as of January 2?

3. The adjustment to correct petty cash fund involves a credit to petty cash fund at:

4. What is the adjusted petty cash fund as of December 31?

 PROBLEM 6:

The Datung Manufacturing Co. had very poor internal control over its cash transactions. Data
pertaining to its cash position at October 31, 2014 were as follows:
The cash book showed a balance of P125,245, which included undeposited receipts. A credit of
P8,000 per bank statements for the month of October, for deposits made did not appear on
the books of the company. Moreover a customer check dated September 12, amounting to
P2,300 was returned by the bank with the October bank statement for insufficiency of fund.
The bank statement had a balance of P144,975.00.

The outstanding checks were as follows:

No. 0210667 P 4,720
0210671 5,200
0210693 10,130
0210734 7,620
0210737 16,270
0210749 6,610
The cashier misappropriated all undeposited receipts in excess of P10,770 and prepared the
following reconciliation:
Datung Manufacturing Co.
Bank Reconciliation
October 31, 2014

Balance per books, October 31, 2014 125,245

Add: Outstanding checks
No. 0210734 7,620
0210737 16,270
0210749 6,610 30,500
155,745
Less: Undeposited receipts 10,770
Balance per bank, October 31, 2014 144,975
Less: Unrecorded credit 800.00
Correct cash balance, October 31, 2014 136,975

You also discovered per the cut-off bank statement dated November 15, 2014 that the bank
was not able to include among October bank debits, the October bank service charge
amounting to P1,250.

Requirements:
1. How much did the cashier misappropriate?

2. What is the correct cash balance to be reported in the October 31, 2014 Statement of
Financial Position?

3. Adjusting entries to correct the cash balance involves a net credit to cash amounting
to:
 PROBLEM 7:

You were assigned to audit the financial statement of Jade Corp. on January 15, 2015, for the
year ended December 31, 2014. The general ledger shows cash account balance of P726,600
as at December 31, 2014.

The bank reconciliation prepared by the client’s cashier included the following items:
Cash per records, December 31, 2014 P726,600
Cash per bank statement, December 31, 2014 792,285
Note receivable collection by the bank in December, recorded in the
books in January 3 20,000
Bank service charge for December, recorded in books in January 3 5,000
Outstanding checks 75,975
Check of Jude Corp., charged by the bank in error on December 28,
2014; corrected by the bank on January 2, 2015 2,250
Deposit in transit 10,500

From January 2, 2015, to January 15, 2015, the date of your cash count, total cash receipts
appearing in the cash records amounted to P180,500. During the same period, deposits
clearing the bank amounted to P143,895. The following cash and cash items were on hand at
the close of business on Janaury 15, 2015:
Currency P4,275
Customers’ checks 5,850
Expense vouchers 1,125

Audit notes:
a. Cash collections from accounts receivable were erroneously recorded by the company as
follows:
Date
7/05/14 Allowance for bad debts 12,000
Accounts receivable 12,000
12/10/14 Inventory 9,000
Accounts receivable 9,000
12/15/14 Bad debt expense 10,500
Accounts receivable 10,500

b. Check deposit on January 5, 2015, amounting to P6,000 was not recorded in the books.

c. Undeposited collections on January 10, 2015 amounting to P13,500 was also not recorded
in the books.

Requirements:
1. What is the correct cash in bank balance as of December 31, 2014?

2. What is the net adjustment to cash as of December 31, 2014?

3. What is the cash shortage as of December 31, 2014?

4. What is the total cash shortage as of January 15, 2015?

 PROBLEM 8:

In the course of your audit of the cash in bank account of Pira Co., you obtained the following
information:

a. The bank statement on May 31, 2014 showed a balance of P1,836,000.

b. Among the bank credits in May was customer’s note for P600,000 collected for the
account of the company which the company recognized in June among its receipts.

c. Included in the bank debits for the month of May were cost of service charges
amounting to P7,200 and a P240,000 check which was charged by the bank in error
against Pira’s account.

d. You also ascertained that there were deposits in transit amounting to P480,000 and
outstanding checks totaling P1,020,000 by the end of May.

e. The bank statement for the month of June showed total credits of P2,496,000 and
total charges of P1,224,000.

f. The company’s books for June showed total debits of P4,818,600, total credits of
P2,443,200 and a balance of P2,913,600.

g. Bank debit memos for June were: No. 121 for service charges, P9,600 and No. 122 on
a customer’s returned check marked “Refer to Drawer” for P144,000.

h. On June 30, 2014 the company placed with the bank a customer’s promissory note
with a face value of P720,000 for collection. The company treated this note as part of
its receipts although the bank was able to collect on the note only in July, 2014.

i. A disbursement check of P45,000 was recorded by the company as P450,000 in the

month of May. This error was corrected in the books in June.

j. Another check for P23,760 was recorded in the company cash payments books in June
as P237,600.

Requirements:
1. How much is the unadjusted cash balance per books as of May 30, 2014?

2. How much is the adjusted cash balance as of May 30, 2014?

3. How much is the cash shortage/overage on May 30, 2014?

4. What is the correct deposit-in-transit as of June 30, 2014?

5. What is the correct outstanding checks as of June 30, 2014?

6. How much is the adjusted cash balance as of June 30, 2014?

 PROBLEM 9:

The following information was provided by Krame Inc. as of the fiscal year ended September
30, 2015:

Ausgust 31 September 30
Loan proceeds directly credited by the bank 200,000 250,000
Note payable payment by the bank 120,000 80,000
Undeposited collections 450,000 ?
Outstanding checks 180,000 ?
Total credits per bank statement 1,955,000
Total debits per bank statement 1,655,000
Total debits per books 1,795,000
Total credits per books 1,800,000

Additional information:
a. A P100,000 collections was erroneously recorded twice in the books in September, the
company discovered the error and corrected the same immediately in September.

b. A P50,000 disbursement check was recorded in the books as P5,000 in August. The
correction was made in September.

c. The bank erroneously credited the company P80,000 in August for a collection of Kare
Corp. The bank corrected the error in September.

d. The unadjusted balance per book in August was at P640,000. The unadjusted balance
per bank in September was at P785,000.

Requirements:
1. What is the correct cash in bank balance as of August 31, 2015?

2. What is the correct deposit in transit as of September 30?

3. What is the correct outstanding checks as of September 30?

4. What is the correct cash in bank balance as of September 30?

 PROBLEM 10:

Following the information pertains to the Cash in Bank account of Mango Company for the
month of April, 2014:

a. Balances per bank statement March 31, P21,560, and April 30, P23,040.

b. Balances of Cash in Bank account in Company’s books: March 31, P16,545, and April
30, P22,680.

c. Total receipts per books were P222,190 of which P1,210 was paid in cash to a creditor
on April 16.

d. Total charges in the bank statement during April were P218,970.

e. Undeposited receipts were: March 31, P9,060 and April 30, P10,120.

f. Outstanding checks were: March 31, P2,675 and April 30, P1,930, of which a check for
P500 was certified by the bank on April 22.

g. NSF checks returned, recorded as reductions of cash receipts were:

1. Returned by Bank in April, recorded also in April, P1,040
2. Returned by Bank in April but recorded in May, P860.

h. Collections by Bank not recorded by company were P12,150 in March, and P11,640 in
April.

i. Bank service charges not entered in company’s books were: March 31, P750, and April
30 P420.

j. A check for P950 of Marang Company was charged to Mango Company in error.

k. A check drawn for P840 was erroneously entered in the books as P480.

Requirement:
In four-column proof-of-cash statement where the bank and book figures are brought to
corrected balances, determine the following:

1. Adjusted cash in bank as of March 31 per bank and per books.

2. Adjusted cash in bank as of April 30 per bank and per books.

3. Adjusted cash receipts for April per bank and per books.

4. Adjusted cash disbursements for April per bank and per books.