CHAPTER 1

AUDIT OF CASH

AUDIT PROGRAM FOR CASH

Audit Objectives:

To determine that:

 Cash balances at the balance sheet data represent cash and cash items on
hand, in transit to, or in depository banks.
 Cash transactions have been properly recorded.
 Cash balances are properly described and classified, and adequate disclosures
with respect to amounts restricted as to withdrawal are made in the financial
statements.

Audit Procedures:

1. Conduct a cash count of undeposited collections, petty cash, and other funds.
 Obtain custodian’s signature to acknowledge return of items counted.
 Reconcile items counted with general ledger balances.
 Trace undeposited collections counted to bank reconciliation.
 Follow up dispositions of items in cash counted:
 Undeposited collections should be traced to bank deposits.
 Checks accommodated in petty cash should be deposited after the count
to establish their validity.
 IOUS in the petty cash should be confirmed and traced to collections in
the next payroll period.
 Expense vouchers should be traced to the succeeding replenishment
voucher.
 Coordinate cash count with count of marketable securities and other
negotiable assets of the client.
 Obtain confirmation of year end fund balances of cash not counted in
branches or other offices.

2. Confirm bank balance by direct correspondence with all banks in which the
client has had deposits and loans during the year.
3. Obtain or prepare reconciliation.
 Check arithmetical accuracy of reconciliation.
 Trace balance per book to the general ledger balance of cash account.
 Trace balance per bank statement and compare with amount confirmed
by bank.
 Establish authenticity of reconciling items by reference to their respective
sources, like:
 Bank debit or credit advices.
  Duly approved journal vouchers.
 Investigate checks outstanding for a long period of time.
 Consider adjustment, especially if the check is already state.
 Consider the possibility of an erroneous preparation of the
check.
 Investigate any unusual reconciling items.
 Where internal control over cash is weak, consider preparing a proof of
cash reconciliation.

4. Obtain cutoff bank statement showing the client’s transactions with the bank at
least one week after the balance sheet date, and:
 Trace year-end reconciling items, like:
 Deposit of the year-end undeposited collections.
 Completeness of year-end outstanding checks.
 Corrections of bank errors.
 Examine supporting documents of year-end outstanding checks that did
not clear in the cutoff bank statements.

5. Obtain a list of interbank transfer of funds a few days before and after the
balance sheet date.
 Vouch supporting documents.
 Ascertain that the related receipts and disbursements were booked by the
client within the same day or at least with the same month.

6. Test reasonableness of cutoff by:

 Comparing dates of checks returned with cutoff bank statement to dates
of recording in the cash disbursement register.
 Tracing receipts recorded a few days before balance sheet date to bank
deposits.

7. Inspect savings account passbook and certificates of deposits.

 Reconcile with book balances.
 Update interest earned posting on passbooks, if necessary.
 Compare balances with bank confirmation reply.

8. Determine any restrictions on availability of cash.

9. Determine propriety of financial statement presentation and adequacy of

disclosures.
PROBLEM 1-1

COMPUTATION OF CORRECT CASH BALANCE

The following are the cash balances of Leonor, Inc. at December 31, 2007:

Undeposited collections (in currency and coins) P 20,000

Current account-unrestricted P 735,200
December 2007 but are to be released to the
Payees in January 2008 P 145,000
Restricted time deposits (expected use in June 2008) P 1,500,000

Leonor, Inc. has agreed to maintain a P 100,000 compensating balance in its

unrestricted current account in accordance with the loan covenant.

How much should Leonor, Inc. report cash in its December 31, 2007, balance sheet?

PROBLEM 1-2

COMPUTATION OF CORRECT CASH BALANCE

The accountant of Santiago Company is in the process of preparing the company’s

financial statements for the year ended December 31, 2007.He is trying to determine
the correct balance of cash and cash equivalents to be reported as a current asset on
the balance sheet. The following items are being considered:

 Balances in the company’s accounts at the Metropolitan Bank:

Current account P 27,000
Savings account P 44,200
 Undeposited customer checks of P 6,400
 Currency and coins on hand of P 1,160
 Savings account at the Northern Philippines Bank with a balance of P
800,000.This account is being used to accumulate cash for future plant
expansion (in 2009)
 Petty cash of P 400
 P 40,000 in a current account at the Northern Philippines Bank. This
represents a 20% compensating balance for P 200,000 loan with the bank.
Santiago Company may not withdraw the funds until the loan is due in 2010.
 Treasury bills:
Two-month maturity bills P 30,000
Seven-month bills 40,000
What is the correct balance of cash and cash equivalents to be reported in the current
assets section of the 2007 balance sheet?

PROBLEM 1-3

DETERMINING WHICH ITEMS TO INCLUDE IN CASH

Which of the following items should be included in the cash balance at

December 31, 2007?
I. A check payable to the company, dated January 3, 2008, in payment of
a sale made in December 2007.

II. A check payable to a vendor, dated and recorded in the company’s

books on December 31, 2007, but not released until January 4, 2008.

a. I only
b. II only
c. I and II only
d. Neither I or II

PROBLEM 1-4

CASH AND CASH EQUIVALENTS ON THE BALANCE SHEET

Your audit of the December 31, 2007, financial statements of Dionisio Corp.
reveals the following:

Current account at Prime Bank P(10,000)

Current account at Prudent Bank 45,000
Treasury bills (acquired 3 months before maturity) 100,000
Treasury bills (maturity date is Dec. 31, 2008) 1,500,000
Payroll account 130,000
Foreign bank account-restricted (translated using
the December 31, 2007, exchange rate) 2,000,000
Postage stamps 1,250
Employees postdated check 4,500
IOU from the Vice-president 8,000
Credit memo from a supplier for a purchase return 8,100
Traveller’s check 7,000
Money Order 4,300
Petty cash fund (P 3,000 in currency and expense
receipts for P 12,000) 15,000

What amount would be reported as “cash and cash equivalents” on the

balance sheet on December 31, 2007?
PROBLEM 1-5

COMPENSATING BALANCE

Victoria, Inc. needs P 2,000,000 to finance its expansion program. Victoria, Inc.is
negotiating a loan with metropolis bank which requires the company to maintain a
compensating balance of 10% of the loan principal on deposit in a current account at
the bank. Victoria, Inc. currently maintains a balance P 20,000 in its current account.
The current account earns interest of 2% per annum, the interest rate on the loan is
12% per annum,

1. What is the principal amount of the loan?

a. P 2,200,000
b. P 2,000,000
c. P 1,980,000
d. P 2,220,000

2. What is the effective interest rate on the loan?

a. 13.2%
b. 11.8%
c. 13%
d. 12%