CHAPTER 3

CASH
ESTELLOSO & ORDANEZA
OBJECTIVES:
 State the auditor’s principal objective in
auditing the cash balances;
 Identify internal control procedures to
safeguard cash and ensure reliability recorded
cash transactions;
 Apply audit procedures to establish
management’s assertions on cash balances;
 Prepare cash count sheet, based on actual
cash count;
OBJECTIVES:

 Reconcile bank balances;

 Formulate audit adjustments to bring cash to
correct balances; and
 Evaluate the appropriateness of the
presentation of cash balance in the statement
of financial position; and
CASH
 CASH INCLUDE MONEY AND OTHER
NEGOTIABLE INSTRUMENTS THAT IS
PAYABLE IN MONEY AND ACCEPTABLE
BY THE BANK FOR DEPOSIT AND
IMMEDIATE CREDIT. IT INCLUDES CASH
ON HAND, DEMAND DEPOSIT AND
OTHER ITEMS THAT ARE
UNRESTRICTED FOR USE IN THE
CURRENT OPERATIONS.
Unrestricted Cash – (PAS 1, par 66) An entity
shall classify an asset as current when the
asset is cash or a cash equivalent unless it is
restricted from being exchange or use to settle
a liability for at least twelve months after the
end of reporting period.

Accordingly, to be reported as cash, an item

must be unrestricted in use.
 AUDIT OBJECTIVE
 Obtain an understanding of internal control
procedures adopted by the company to safeguard
cash;
 Establish the existence of the recorded amount
cash;
 Establish the completeness of recorded cash;
 Determine that the client has rights to recorded
cash, and
 Establish that the presentation and disclosure of
cash is appropriate. ( in accordance to PFRS)
 INTERNAL CONTROL
 Segregation of the custodian function from the
record keeping functions.
 Segregation of incompatible duties minimizes
fraud.
 Segregation of duties also may help detect the
unintentional errors.
 The number of individual involved in the
transaction must be controlled.
 Individual responsibilities for cash is fixed.
INTERNAL CONTROL PROCEDURES OVER
CASH RECEIPTS
a. No one person should be assigned the function of
cash handling and record keeping.
b. Official receipts must be pre-numbered and
subsequently used.
c. Official receipts must be deposited intact.
d. Deposit should be match with the receipts.
e. Cash sales should be recorded at the point of sale.
f. Cash register totals and credit card machines should
be balanced daily. Shortage and overage is
monitored.
CONTROL OVER CASH DISBURSEMENTS

a. All disbursement must be properly authorized

and adequately documented.
b. Payment must be made by checks, electronic
fund transfer, or from petty cash fund.
c. Issued checks must be sequentially
numbered.
d. Checks should be assigned by at least two
persons to prevent fictitious disbursements;
CONTROL OVER CASH DISBURSEMENTS

e. Check signatures shall be the persons in

appropriate high levels in the organization.
f. Checks must be payable to specific entries
(company or person) and must not be made
payable to cash.
Periodic bank reconciliation must be made by a
independent of the authorization, check signing
function and cash receipts function.
AUDIT PROCEDURES
 Identify the risks of material or immaterial
misstatements for cash and gathering audit
evidence to reduce the risks to acceptable
level.
 Common risks: not recording the transactions,
non-existence of the cash balances, and
inappropriate record of cash in reporting
period.
 Petty Cash Fund
-small amount of cash in a fund to pay MINOR
EXPENSES

a. Imprest fund system – system of cash which

requires that all cash receipts should be
deposited intact and all cash disbursements
should be made by means of check.
b. Fluctuating fund system -
 ESTABLISHMENT OF FUND

Journal entry

Petty Cash Fund xx

Cash in Bank xx
 PAYMENT OF EXPENSES
NO ENTRY

 REPLENISHMENT OF FUND
Expense (Various) xx
Cash in Bank xx

 NOTE: Reimbursement should equal to the

amount/sum of petty cash vouchers submitted
 YEAR-END ADJUSTMENT

Journal entry:
Expenses xx
Petty Cash Fund xx

 NOTE:
1. To avoid understatement of expenses
2. To avoid overstatement of assets
TO INCREASE OR DECREASE PETTY CASH FUND

Petty Cash Fund xx

Cash in Bank xx
(To increase PCF)

Cash in Bank xx
Petty Cash Fund xx
(To decrease PCF)
 CASH SHORTAGE/OVERAGE
 Nominal account that is debited for shortages and
credited for overages in the Petty Cash Fund
 Error in making change fund or failure to obtain
receipts for very small amounts
 Incorrect recording of amounts and theft/loss
 Cash shortage is debited to miscellaneous
expense at the end of the period
 Cash overage is credited to miscellaneous income
and deposited to general cash account at the end
of the period and the journal entry is
Cash xx
Miscellaneous Income xx
AUDIT PROCEDURES
 In conducting the cash count, the items counted shall be compared with the
cashier’s accountability. The items may include the following:
Currency and coins Pxx
Checks
Checks representing collections
(dated and post-dated) xx
Checks for disbursements (entrusted to
custodian) xx
Properly approved petty cash vouchers
evidencing payments xx
IOUs with no supporting vouchers xx
Total per count Pxx
 The cashier's accountability includes all items entrusted to the
cashier for which he or she is accountable to the entity or
another party. The cash custodian may be accountable for the
following:

Imprest balance of the cash fund Pxx

Checks or money items for payment to another
(Meralco, PLDT, etc.) xx
Collections temporarily handled by the custodian
for remittance to the general cashier xx
Other collections handled by the custodian xx
Cashier’s accountability Pxx
 BANK RECONCILIATION

Report that explains the difference between the

book (company) balance of cash and the cash
balance reported in the bank statement.
BANK STATEMENT

-monthly report provided by the bank to the

depositor which shows the following:
o Beginning-of-the-month cash balance
o Total deposits made by the depositor and other
bank credits
o Checks paid by the bank and other charges
o End-of-month cash balance
BANK RECONCILING ITEMS

 Deposits in transit/Undeposited collections

 Outstanding checks

 Errors
BOOK RECONCILING ITEMS

 Debit memos
 Credit memos

 Errors
 DEPOSITS IN TRANSIT/UNDEPOSITED
COLLECTIONS

 Deposit made near the end of the month and

recorded on the depositor’s books but is not
received by the bank in time to be reflected on the
bank statement (DIT)
 Collections still in the hands of the depositor
awaiting delivery to the bank for deposit
 Comparing the receipts in the accounting record
and deposits in the bank statement
 Understate the bank balance
 Added to the bank balance
 OUTSTANDING CHECKS

 Checks written by the company issued to payees

but have not been cleared or presented to the
bank for payment
 Comparing written checks during the month as
reflected in the company’s check voucher or cash
disbursements book with the cancelled checks
included in the bank statement
 Overstate the bank balance
 Deducted from the bank balance
Cancelled checks – checks that the bank has paid
and deducted from the depositor’s account.
 DEBIT MEMOS

 Charges to the company’s or depositor’s

account made directly by the bank such as
returned checks (NSF and technically defective
checks), bank service charge, charge for the
cost of check booklets and payment of bank
loans
 Overstate the book balance

 Deducted from the cash balance perbook

 CREDIT MEMOS

 Deposits or credits made directly by the bank to

the depositor’s account such as notes collected
by bank in favor of the depositor, proceeds of
bank loan and interest earned on the
depositor’s account and matured time deposits
 Understate the book balance

 Added to the cash balance per book

 FORMS OF BANK RECONCILIARTION

 Adjusted Balance Method

 Book to Bank Balance Method

 Bank to Book Balance Method

 ADJUSTED BALANCEMETHOD
 Under this method, the book balance and the bank
balance are brought to a correct cash balance that must
appear on the balance sheet

PROFORMA RECONCILIATION
Book balance xx Bank balance xx
Add: Credit memo xx Add: DIT XX
Total XX Total xx
Less: Debit memos xx Less: OC xx
Adjusted book balance xx Adjusted bank balance xx
 BOOK TO BANK METHOD
 Under this method, the book balance is reconciled with
the bank balance or the book balance is adjusted to
equal the bank balance
PROFORMA RECONCILIATION
Book balance xx
Add: Credit memos xx
Outstanding Checks xx xx
Total xx
Less: Debit memos xx
Deposits in Transit xx xx xx
Bank balance xx
 BANK TO BOOK METHOD
 Under this method, the bank balance is reconciled with the
book balance or the bank balance is adjusted to equal the
book balance

PROFORMA RECONCILIATION
Bank balance xx
Add: Deposits in Transit xx
Debit memos xx xx
Total xx
Less: Outstanding checks xx
Credit memos xx xx
Book balance xx
 DEPOSITS IN TRANSIT
Deposit in transit, beg of the month xx
Add: Cash receipts reflected in the company’s record during the month*
xx
Total xx
Less: Deposits during the month as reflected in the bank statement**
xx
Deposit in transit, end of the month xx

*The amount does not necessarily represents debits (charges) in the

company’s records. If the total of charges to the cash account is
given, any credit memo in PREVIOUS month should be excluded
** The amount does not necessarily represent credits in the bank
statement. If the total of the credits in the bank statement is given,
any credit memo for the CURRENT MONTH SHOULD BE EXCLUDED
 OUTSTANDING CHECKS

To compute the outstanding checks:

Outstanding checks, beg xx
Add: Checks drawn by the company during the month*
xx
Total xx
Less: Outstanding checks xx
Outstanding checks, end xx

*The amount does not necessarily represents credits in the company’s

records. If the total of the credits to the cash account is given, any
debit memo in PREVIOUS month should be excluded
** The amount does not necessarily represent debits (charges) in the
bank statement. If the total of charges in the bank statement is
given, any debit memo for the current MONTH SHOULD BE
EXCLUDED
 PROOF OF CASH

 Reconciles the beginning and ending balances

of cash for the month, as well as the recorded
receipts and disbursements made the bank
and by the depositor’s company