DLSU - DASMARIÑAS

AUDITING PROBLEMS
ReSA REVIEW SCHOOL

AUDIT OF CASH BALANCE

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 remittance advice
d. A bank lockbox system

3. 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.

4. Which of the following would the auditor consider to be an incompatible operation for a cashier if the
cashier receives remittances from the mailroom?
a. Posting the receipts to the accounts receivable subsidiary ledger cards.
b. Making the daily deposit at the local bank.
c. Preparing the daily deposit.
d. Endorsing the checks.

5. 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.

6. 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

7. 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.

8. 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.

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9. 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.

10. 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.

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. 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.

13. 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

14. 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.

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

a. Accountability is equal to valid cash and non-cash items.
b. Accountability is higher than valid cash and non-cash items.
c. Accountability is lower than valid cash and non-cash items.
d. Accountability is zero.

16. 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.

17. 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.

18. 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.

19. 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.

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20. 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.

PROBLEM 2:

You were able to gather the following from the December 31, 2020 trial balance of Rhea Inc. in connection
with your audit of the company:

Petty cash fund 50,000

Cash on hand – undeposited collections 1,500,000
Cash in bank – Metrobank current 4,000,000
Cash in bank – BDO Acct No. 1 3,160,000
Cash in bank – BDO Acct No. 2 (160,000)
Cash in bank – Coco bank savings 4,500,000
Other Cash Items 2,000,000

Audit notes:

1. The petty cash fund consisted of the following items as of December 31, 2020:
Currency and coins P10,000
Employees’ vales 8,000
Currencies/money in an envelope marked “collections for
charity” with names attached 6,000
Unreplenished petty cash vouchers 6,500
Check drawn by Rhea Inc., payable to the petty cashier 20,000
Unused postage stamps 1,500
P52,000

2. Cash on hand represents undeposited collections as of December 31, 2020 and includes the following
items:
a. Customer’s check for P160,000 returned by bank on December 26, 2020 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 3, 2021.
b. Customer’s check for P80,000 dated January 2, 2021, received on December 29, 2020.
c. A customer check for P90,000 dated June 1, 2020 received on the same date and yet to be
deposited and still on hand.
d. Postal money orders received from customers, P100,000.

3. Included among the checks drawn by Rhea Inc. against the Metrobank current account and recorded
in December 2020 are the following:
a. Check written on December 29, 2020 dated January 2, 2021, delivered to payee on
December 29, 2020, P160,000.
b. Check written and dated December 29, 2020 and delivered to payee on January 2, 2021,
P200,000.
c. Check dated April 1, 2020 amounting to P90,000 still outstanding by December 31, 2020.

4. The credit balance in the BDO Current Account No. 2 represents checks drawn in excess of the
deposit balance. These checks were still outstanding at December 31, 2020.

5. The savings account deposit in Coco Bank has been set by the board of directors for acquisition of
new computers. This account is expected to be disbursed in the next 3 months from the balance
sheet date.

6. Other cash items included: a) P1.2M time deposit with BPI which was purchased on November 1,
2020 and shall mature on November 1, 2021; b) P500,000 money market placements purchased
December 1, 2020 and shall Mature on March 1, 2021, and; c) P300,000 6-months money market
placements purchased on August 1, 2020 maturing on January 31, 2021.

Determine the audited balances of the following:

1. Petty cash fund

2. Petty cash shortage/overage

3. Cash on hand – undeposited collections

4. Cash in bank – Metrobank current

5. Cash and cash equivalents to be reported in the 2020 balance sheet

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PROBLEM 3:

A count of the Petty Cash Fund having an imprest balance of P10,000 of Reyes Corp. showed its composition
as follows:
Coins and currency…………………………………….. P 2,900
Paid vouchers:
Transportation…………………………………….... P 600
Gasoline…………………………………………………. 400
Office supplies……………………………………….. 500
Postage stamps……………………………………… 300
Due from employee………………………………. 1200 3,000
Manager’s check returned by bank
Marked “NSF”………………………………………… 1,000
Check drawn by company to the order of
petty cash custodian…………………………….. 2,700
Unused postage stamps 300
Petty cash receipt voucher 500

The petty cash receipt voucher is for a return of travel expense advance.

What is the petty cash shortage?

PROBLEM 4:
A count of the undeposited receipts under the custody of U. Rita, cashier of Ube Corp., on September 30,
showed the following composition:

Currency and coins P24,620

Unused postage and documentary stamps 220

Checks:
Date Payee Drawer
3-24-20 Cash U. Rita 2,000
9-20-20 Ube Corp. Tams Co. 4,700
9-27-20 Ube Corp Jonli Inc. 3,920
9-30-20 MERALCO Ube Corp. 1,800

Cash disbursements out of receipts 3,000

Total per count P 40,620

Assuming the cashier’s accountability to be P36,940 per the client’s record, what was the amount of
shortage/overage on September 30?

PROBLEM 5:

You obtained the following information on the current account of Bugs Corp. During your examination of its
financial statements for the year ended December 31, 2020.

The bank statement on November 30, 2020 showed a balance of P918,000. Among the bank credits in
November was customer’s note for P300,000 collected for the account of the company which the company
recognized in December among its receipts. Included in the bank debits were cost of checkbooks amounting
to P3,600 and a P120,000 check which was charged by the bank in error against Bugs Corp.’s account. Also
in November you ascertained that there were deposits in transit amounting to P240,000 and outstanding
checks totaling P510,000.

The bank statement for the month of December showed total credits of P1,248,000 and total charges of
P612,000. The company’s books for December showed total debits of P2,206,800, total credits of 1,221,600
and a balance of P1,456,800. Bank debit memos for December were: No. 121 for service charges, P4,800
and No. 122 on a customer’s returned check marked “Refer to Drawer” for P72,000.

On December 31, 2020 the company placed with the bank a customer’s promissory note with a face value of
P360,000 for collection. The company treated this note as part of its receipts although the bank was able to
collect on the note only in January, 2021.

A check for P11,880 was recorded in the company cash payments books in December as P118,800.

Requirements:
1. How much is the undeposited collections as of December 31?

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 2. How much is the outstanding checks as of December 31?

3. How much is the adjusted cash balance as of November 30?

4. How much is the adjusted cash balance as of December 31?

PROBLEM 6:

The following information was provided by Krame Inc. as of the fiscal year ended September 30, 2020:

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?

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?

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