AUDITING PROBLEMS

AUDIT OF CASH - can also be Counter balancing or non-

counter balancing.

1 Audit of CCE Common Assertions for CCE

Fraud Risk
- verifying the accuracy, existence,
completeness, and valuation of cash and
- Misappropriation of cash or unauthorized
liquid assets reported in an entity’s FS
transactions.
- Overstating cash balances to inflate financial
Cash & Cash Equivalents - critical components
position. (kiting and Fictitious cash balances)
of financial reporting, as they represent liquid
resources that businesses use for operations and Risk of Errors
investments.
Note: - Misstatements due to incomplete or
Auditors must ensure these balances are free inaccurate bank reconciliations.
from material misstatement or fraud - Cutoff errors
- Misclassificaiton
- Mathematical Errors
Key Assertions for Cash and Cash
Equivalents Valuation and presentation Risks

1. Existence: Verify that the reported cash and - Inadequate Disclosures

cash equivalents exist at the reporting date o Failing to disclose restrictions,
2. Completeness: Ensure all cash and cash collateral, or significant policies for
equivalents owned by the entity are included cash equivalents.
in the financial statements. - Improper Presentation
3. Accuracy/Valuation: Confirm the accuracy - Incorrect classification of investments as cash
of the recorded balances and that they are equivalents.
properly valued - Completeness risks
4. Ownership (Rights and Obligations): Ensure Control weakness (control risk)
the entity has ownership rights over the
reported cash and cash equivalents. - Poor segregation of duties, lack of proper
5. Presentation and Disclosure: Verify proper authorization and insufficient monitoring may
classification, presentation, and disclosure in expose cash to theft or mismanagement.
the financial statements in line with
accounting standards. 2 Audit Procedure for CCE

ERRORS
1 Understanding the Internal
- may affect one of the FS or the complete set Controls
of FS (pervasive errors). - Review internal controls over cash

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AUDITING PROBLEMS
management, such as segregation of 6 Test Cash Equivalents
duties, bank reconciliations, and
- Verify the existence, valuation, and
authorization processes.
classification of investments classified as
- Assess controls over cash receipts, cash
cash equivalents (e.g., short-term
disbursements, and investments in cash
marketable securities, treasury bills).
equivalents.
- Check compliance with the entity’s cash
equivalents policy and relevant accounting
2 Obtain and Review Bank standards.
Reconciliations
- Verify that bank reconciliations are 7 Review and Investigate Unusual
prepared regularly and accurately. Transactions
- Trace reconciling items (e.g., outstanding
- Analyze large or unusual transactions in
checks, deposits in transit) to supporting
cash accounts to detect possible
documents like bank statements, checks,
misstatements or fraud.
and deposit slips.
- Look for evidence of kiting (moving cash
between accounts to inflate balances) or
3 Bank Confirmations unauthorized transactions
- Send confirmation requests to banks to
verify: o Account balances. 8 Analytical Procedures
o Outstanding loans, liens, or overdrafts.
- Compare current period cash and cash
o Details of pledged or restricted cash.
equivalents with prior periods to identify
- Use standard bank confirmation forms (e.g.,
significant fluctuations.
as per auditing guidelines in the jurisdiction)
- Assess the reasonableness of cash flows in
relation to operations and other financial
4 Verify Cash on Hand metrics
- Perform a physical cash count for petty
cash and other on-hand cash at the 9 Test Presentation and Disclosure
reporting date.
- Verify that cash and cash equivalents are
- Reconcile the physical count with the
correctly presented on the balance sheet.
recorded amounts in the general ledger.
- Ensure adequate disclosure of:
o Restricted cash or pledged funds.
5 Review Cutoff Procedures o Policies for classifying cash equivalents
- Ensure that cash transactions near the Problems
reporting date are recorded in the correct
accounting period.
- Verify the timing of cash receipts and 1 Notes on Cash Count problems
disbursements around the year-end date

1. Identify the accountability:

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AUDITING PROBLEMS
a. If Petty cash fund, the accountability is the count date are not recorded as
Imprest Balance per General Ledger collection, thus should not be included
b. If undeposited collections, the as valid support)
accountability is total undeposited iii. Any evidence of the use of collections to
collections per books/records adjusted pay certain expenses such as unused
further for any unrecorded collections postage stamps
(based on additional information of the
problem) Problem 1: Cash count
c. Other collections not intact such as return You were assigned to render a cash count of
of expense advance, collection for charities Tindahan Company’s petty cash fund with an
or any other purposes and assumed to imprest balance of P40,000. The count was
have been included among currencies on rendered on the morning of January 4 instead
hand. If the said collections for any other of exactly at the balance sheet date December
purpose is intact, the same shall be 31.
ignored in the cash count.
The Petty Cash Fund Custodian presented to
2. Identify valid supports to the accountability you the following:
as presented in the problem
a. For Petty cash fund, acceptable valid Currencies and coins 10,940
support shall include: A disbursement check payable to 15,600
i. Bills and coins, Replenishment check, the custodian
cashable accommodated/cashed An officer’s personal check 4,000
checks (valid cash items) accommodated by the fund
ii. Unreplenished petty cash expense Officer’s check marked NSF 2,000
vouchers (Adjusted to various expense Petty Cash expense vouchers:
accounts) 12/20 Transportation 1,500
iii. Employee IOUs (adjusted to 12/24 Office repairs 900
receivables) 12/27 Miscellaneous 2,100
 Post dated/NSF checks (assumed 1/3 Office supplies 1,600
to be an accommodated checks to Unused postage stamps 500
be adjusted to receivable). An enveloped marked “collections 2,000
 Note that unused postage is not for charity” with list of names and
valid support where the corresponding amounts
accountability is the Petty cash contributed. There is no money
fund inside the envelope
b. For Undeposited collections
i. Bills and coins, money orders and bank Further audit investigation revealed that
drafts customer collections on the count date
ii. Depositable customer collection checks amounting to P12,500 (per official receipts and
as of the count date (Postdated, stale customer remittance advices) were not yet
and NSF collection checks as of the

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AUDITING PROBLEMS
recorded in the cash receipt books. balance as of December 31, 2021?
3. Assuming the collections for charity had
Required: been intact (the currencies are inside the
1. What is the petty cash shortage/(overage) if envelop), what is the petty cash shortage as
there are any? of December 31, 2021?
2. What is the adjusted petty cash fund

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AUDITING PROBLEMS
Problem 2: Cash count
You were tasked to render a cash count of
Maine Corp.’s undeposited collections
appearing in the cash receipts books was at
P42,000. The count was rendered exactly on
December 31. The custodian presented to you
the following:

Currencies and coins 12,540

Customer collection checks:
12/20 May Lee Co. 11,000
12/28 True Inc. (returned by the 9,000
bank marked NSF)
12/29 Jordan Corp. 21,000
1/3 OTC Inc. 2,000
Postage stamps and other 5,000
disbursement receipts paid out of
collections
Employee IOUs supported by 2,000
employee promissory notes

Further audit investigation revealed that

customer collections on the count date
amounting to P12,500 (per official receipts and
customer remittance advices) were not yet
recorded in the cash receipt books.

Required:
4. What is the cash shortage if any?
5. Assuming that the count date was rendered
on January 5, what is the shortage, if any?

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AUDITING PROBLEMS

2 NOTES ON BANK RECONCILIATION

PROBLEMS

Bank Book

Unadjusted balance xxx xxx Unadjusted balance

Unrecorded bank credits (note and interest
Deposit in Transit/Undeposited
xxx xxx collections by bank, customer payments to
collections
bank, loan proceeds)
Unrecorded bank debits (BSC, NSF checks,
Outstanding checks (Excluding
xxx xxx Note/Loan and interest payments directly
certified checks
through bank)
Bank errors xxx xxx Book errors

Adjusted bank balance xxx xxx Adjusted book balance

a. The adjusted balance per bank shall be the

correct cash balance
b. The net adjustment to cash shall be the
difference between the unadjusted balance
per books and adjusted balance per bank
c. The cash shortage/overage shall be the
difference between the two adjusted balances
shortage if bank book

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AUDITING PROBLEMS
Problem 3: Currency P4,275
Customers’ checks 5,850
You were assigned to audit the financial Expense vouchers 1,125
statement of Jade Corp. on January 15, 2022, for
the year ended December 31, 2021. The general Audit Notes:
ledger shows cash account balance of P726,600
a. Cash collections from accounts receivable
as at December 31, 2021.
were erroneously recorded by the company as
follows:
The bank reconciliation prepared by the client’s
cashier included the following items:
7/05/21 Allowance for bad debts 12,000
Accounts receivable 12,000
Cash per records, December 31, P726,600
12/10/2 Inventory 9,000
2021
1 Accounts receivable 9,000
Cash per bank statement, 792,285
12/15/2 Bad debt expense 10,500
December 31, 2021
1 Accounts receivable 10,500
Note receivable collection by the 20,000
bank in December, recorded in the
b. Check deposit on January 5, 2022, amounting
books in January 3
to P6,000 was not recorded in the books.
Bank service charge for 5,000
c. Undeposited collections on January 10, 2022
December, recorded in books in
amounting to P13,500 was also not recorded in
January 3
the books.
Outstanding checks, including 87,875
P11,900 disbursement check Requirements:
certified by the bank
Check of Jude Corp., charged by 2,250 1. What is the correct cash in bank balance as of
the bank in error on December 28, December 31, 2021?
2021; corrected by the bank on a. 729,060
January 2, 2022 b. 773,110
Deposit in transit, including P5,200 15,700 c. 778,110
customer collection check marked d. 726,810
NSF 2. What is the net adjustment to cash as of
December 31, 2021?
From January 2, 2022, to January 15, 2022, the date a. 46,500
of your cash count, total cash receipts appearing b. 2,460
in the cash records amounted to P180,500. During c. 44,040
the same period, deposits clearing the bank d. 4,620
amounted to P143,895. The following cash and 3. What is the cash shortage as of December 31,
cash items were on hand at the close of business 2021?
on January 15, 2022: a. 2,460
b. 46,500
c. 44,040

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AUDITING PROBLEMS
d. 4,620 b. 37,605
4. What is the total cash shortage as of January c. 44,040
15, 2022? d. 4,620
a. 81,645

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AUDITING PROBLEMS
3 NOTES ON PROOF OF CASH

i. no longer be included in the proof of

NSF Cheks: cash statement if receipt and redeposit
were recorded in the books correctly,
a. An NSF check which is recorded correctly otherwise
during the current period is no longer a ii. if the same was not recorded in the book,
reconciling item. the item shall be added to both the
b. An NSF check which is recorded as a receipt and disbursement columns per
reduction against the receipts for the books, alternatively deducted from both
period shall be added to both receipt and the receipt and disbursement columns
disbursement columns per books. (cash per bank. (cash bal. is unaffected)
ending balance is unaffected)
c. An NSF check received from the bank and
redeposited during the same period shall
Bank and book errors:

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AUDITING PROBLEMS
a. Error in the current month not yet - If the prior month error is an
corrected understatement in receipt the
- if the error is in recording receipt, the correction is recorded by adding to
correction is in the receipt column; if cash, thus the reconciliation is a
the error is in recording disbursement, reduction in the receipt column in the
the correction is in the disbursement current month. If the prior month error
column. is an overstatement in receipt, the
correction is recorded by deducting
b. Error in the current month corrected in the
from cash, thus the reconciliation is a
current month
reduction in the disbursement column
- if the error is in recording receipt (over),
in the current moth. If the prior month
the correction will be recorded as a
error is an understatement in
disbursement, thus the reconciliation is
disbursement, the correction is
a reduction from both receipt and
recorded by deducting from cash, thus
disbursement columns. If the error is in
the reconciliation is a reduction in the
recording disbursement (over), the
disbursement column in the current
correction will be recorded as a receipt,
month. If the prior month error is an
thus the reconciliation is also a
overstatement in disbursement, the
reduction from both receipt and
correction is an addition to cash, thus
disbursement columns.
the reconciliation is a reduction from
i. *Notice that if the error, whether
the receipt column in the current
receipt or disbursement is an
month
understatement error, the
correction will be recorded also in d. Error in the prior month, not yet corrected
receipt or disb., thus a current - If the prior month error is yet to be
month error that is understatement, corrected in the current month, the
whether receipt or disb. is no longer reconciling item will be in the cash
a proof-of-cash reconciling item. balance of the prior month (first
column) and in the current month (last
column)

c. Error in the prior month, corrected in the

current month

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AUDITING PROBLEMS
Problem 4: Proof of Cash

The cash account of Puyat Company shows the following activities:

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AUDITING PROBLEMS

Additional Information:
a. DMs 61 and 112 are for service charges.
b. EC is error corrected
c. DM 57 is for an NSF Check
d. CM 20 is for loan proceeds, net of P150 interest charges for 90 days.
e. CM 16 is for the correction of an erroneous November bank charge.
f. CM 36 is for customers’ notes collected by bank in December
g. Bank balance on December 31 is P592,270

Requirement:
1. The total outstanding checks at November 30 should be __________
2. The total outstanding checks at December 31 should be __________
3. The deposit in transit at November 30 should be ___________
4. The deposit in transit at December 31 should be ____________
5. The adjusted book balance at November 30 should be _____________
6. The adjusted bank receipts for the month of December should be _____________
7. The adjusted book disbursements for the month of December should be ____________
8. The adjusted bank balance at December 31 should be ___________

1. To gather evidence regarding the balance per d. Payment to an employee for more hours
bank in a bank reconciliation, the auditor than he worked.
would examine any of the following except: 3. Which of the following procedures would the
a. Cut-off bank statement auditors most likely perform to test controls
b. Bank Confirmation relating to management’s assertion about the
c. Year-end bank statement completeness of cash receipts for cash sales
d. General Ledger in a grocery store which inevitably operates on
2. Which of the following errors would not be a cash basis?
discovered during the test of the bank a. Observe the consistency of employees’ use
reconciliation? of cash registers and tapes
a. Cash received by the client subsequent to b. Inquire about employees’ access to
the balance sheet date but recorded as recorded but undeposited cash
cash receipt in the current year. c. Trace deposits in the cash receipts journal
b. Deposits recorded in the cash book near to the cash balance in the general ledger
the end of the year, deposited in the bank, d.
and included in the bank reconciliation as d. Compare the cash balance in the general
a deposit in transit ledger with the bank confirmation request.
c. The existence of payments on notes 4. Reconciliation of the bank account should not
payable that were debited directly to the be performed by individual who also:
bank balance by the bank but were not a. Process cash disbursements
entered in the client’s records b. Has custody of securities

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AUDITING PROBLEMS
c. Prepares the cash budget
d. Reviews inventory reports
5. The auditors suspects that a clients’ cashier is
misappropriating cash receipts for personal Items 8 and 10 are based on the ff:
use by lapping customer checks received in Miles Company
the mail. In attempting to uncover this Bank Transfer Schedule
embezzlement scheme, the auditors most December 31, 2020
likely would compare the:
a. Details of deposit slips with details of
credits to customer accounts
b. Daily cash summaries with the sums of the
cash receipts journal entries 8. The tick mark * most likely indicates that the
c. Individual bank deposit slips with the amount was traced to the
details of the monthly bank statements a. December cash disbursements journal.
d. Dates uncollectible accounts are b. Outstanding check list of the applicable
authorized to be written off with the dates bank reconciliation.
the write-offs are recorded. c. January cash disbursements journal.
6. The cashier diverted cash received over the d. Year-end bank confirmations.
counter from a customer to his own use and 9. The tick mark ^ most likely indicates that the
wrote off the receivable as bad debt. Select amount was traced to the
the control that should have prevented the a. Deposits in transit of the applicable bank
error. reconciliation.
a. Aging schedules of accounts receivable b. December cash receipts journal.
are prepared c. January cash receipts journal.
b. Journal entries are approved by a d. Year-end bank confirmations.
responsible official 10. A cash shortage may be concealed by
c. Receipts are given directly to the cashier transporting funds one location to another or
by the person who opens the mail by converting negotiable assets to cash.
d. Remittance advises, letters, or envelopes Because of this, which of the following is vital?
that accompany receipts are separated a. Simultaneous confirmations.
and given directly to the accounting b. Simultaneous bank reconciliations.
department c. Simultaneous verification.
7. The audit procedure referred to as proof of d. Simultaneous surprise cash count.
cash receipts is useful to test
a. Whether all recorded cash receipts have
been deposited in the bank
b. Time lags in making deposits
c. Whether there are cash receipts that have
not been recorded int eh journals
d. All of the these

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