ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 44  October 2022 CPA Licensure Examination

FARAP-4401
FINANCIAL ACCOUNTING AND REPORTING / AUDITING PRACTICE
S. IRENEO  C. UBERITA  G. MACARIOLA  C. ESPENILLA  J. BINALUYO

CASH & CASH EQUIVALENTS

Composition of Cash:
a. Undeposited currency and coins
b. Demand deposits deposited in checking and savings account that can be withdrawn anytime, without
advance notice
c. Undeposited negotiable checks payable to the company or bearer awaiting deposit
d. Foreign currencies converted to Philippine peso
e. Bank drafts are commitments by banking institutions to advance funds on demand by the party
to whom the draft was directed
f. Money orders are similar to bank drafts but are drawn generally from authorized post offices or other financial
institutions.
g. Other short-term funds for current operations like:
Petty Cash Fund (Coins, bills, replenishment checks and employees’ checks)
Dividend Fund
Change Fund
Tax Fund
Interest Fund
Payroll Fund
Fund for the Acquisition of Current Assets

Cash Equivalents
Cash equivalents are short-term highly liquid investments that are readily convertible into cash and so near their
maturity that they present insignificant risk of changes in value due to changes in interest rates. Only highly liquid
investments that are acquired three months, or less than three months, before maturity can qualify as cash
equivalents such as the following:

a. Three-month commercial paper or money market instrument

b. Three-month time deposit
c. Three-month treasury bills

Valuation of Cash in the Statement of Financial Position

a. Generally valued at face amount
b. Cash in foreign currency is valued in Philippine peso using the current exchange rate as of the reporting
date

Cash in Closed Banks or in Banks havi Financial Difficulty

Cash in bank or in financial institutions having financial difficulty or in bankruptcy should be shown at its
estimated realizable or recoverable value and is presented as Receivables.

Financial Statement Presentation

Cash and Cash Equivalents are the first item shown among the current assets, the details of which are presented
in the notes to financial statements.

Compensating Balance
The minimum amount to be maintained in a bank account to act as collateral for the payment of a depositor’s
loan. Its presentation in the financial statements is dependent on whether the balance is legally restricted or
unrestricted:
1. Legally restricted compensating balance if held as collateral for:
a. Short-term borrowing--Shown separately under current assets but not part of “Cash and Cash
Equivalents”.
b. Long-term borrowings—Shown separately as non-current asset either as Long-term Investments or
Other Assets
2. Unrestricted – Should as part of Cash

FINANCIAL ACCOUNTING AND REPORTING-THEORIES

1. Cash equivalents are

a. Short-term and highly liquid investments that are readily convertible into cash.
b. Short-term and highly liquid investments that are readily convertible into cash with remaining
maturity of three-months.
c. Short-term and highly liquid investments that are readily convertible into cash and acquired three
months before maturity.
d. Short-term and highly liquid marketable equity securities.

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CASH AND CASH EQUIVALENTS
FARAP-4401
2. A compensating balance
a. Must be included in “cash and cash equivalents”.
b. Which is legally restricted and related to a long-term loan is classified as current asset.
c. Which is legally restricted and related to a short-term loan is classified separately as current asset.
d. Which is not legally restricted as to withdrawal is classified separately as current asset.

3. Which of the following is usually considered cash?

a. Certificate of deposit.
b. Checking account.
c. Money market saving certificate.
d. Customer’s Postdated check.

4. Petty cash fund is

a. Separately classified as current asset.
b. Money kept on hand for making minor disbursements of coin and currency rather than by writing
checks.
c. Set aside for the payment of payroll.
d. Restricted cash.

5. The petty cash fund account under the imprest fund system is debited
a. Only when the fund is created.
b. When the fund is created and every time it is replenished.
c. When the fund is created and when the size of the fund is increased.
d. When the fund is created and when the fund is decreased.

6. Which of the following statements is not true?

a. Adjustment of the petty cash account is made at the end of the period to avoid understatement of
expenses and overstatement of cash.
b. Entries are made to the petty cash account to increase or decrease the size of the fund or to adjust
the balance if not replenished at year-end.
c. The imprest petty cash system in effect adheres to the rule of disbursements by check.
d. The petty cash account is debited when the fund is replenished.

7. A cash short and over account is

a. A contra account to cash.
b. Debited when the petty cash fund proves out over.
c. Debited when the petty cash fund proves out short.
d. Not generally accepted.

8. What is the major purpose of an imprest petty cash fund?

a. To effectively plan cash inflows and outflows.
b. To ease the payment of cash to vendors.
c. To determine the honesty of the petty cashier.
d. To effectively control cash disbursements.

9. If the cash balance shown in the company’s cash records is less than the correct cash balance and neither
the company nor the bank has made any errors, there must be
a. Outstanding checks.
b. A no-sufficient fund check returned by the bank.
c. Bank charges not yet recorded by the depositor.
d. An interest credited by the bank in the depositor’s account.

10. A bank reconciliation is

a. A formal financial statement that lists all of the bank account balances of an entity.
b. A merger of two banks that previously were competitors.
c. A statement sent by the bank to depositor on a monthly basis.
d. A schedule that accounts for the difference between an entity’s cash balance as shown in the bank
statement and the cash balance as shown in the general ledger.

11. Which of the following items must be added to the cash balance per ledger in preparing a bank reconciliation
which ends with adjusted cash balance?
a. Note receivable collected by bank in favor of the depositor and credited to the account of the
depositor.
b. NSF customer check.
c. Service charge.
d. Erroneous bank debit.

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CASH AND CASH EQUIVALENTS
FARAP-4401

12. Bank reconciliation are normally prepared on a monthly basis to identify adjustments needed in the depositor’s
records and to identify bank errors. Adjustments on the part of the depositor should be recorded for
a. All items except bank errors, outstanding checks and deposits in transit.
b. Bank errors, outstanding checks and deposits in transit.
c. Book errors, bank errors, deposits in transit and outstanding checks.
d. Outstanding checks and deposits in transit.

13. Following are reconciling items in an enterprise’s bank reconciliation statement.

I. Deposits in transit
II. Company’s check for P32,500 recorded in the books for P23,500
III. Note collected by bank in behalf of the company
IV. Deposit of another company erroneously credited by bank to the company’s account
V. No sufficient fund check charged back by bank
VI. Company deposit for P32,500 recorded in the books for P23,500

Which of these adjustments would be shown as addition to the cash balance per books in order to arrive
at the correct cash balance?
a. II, III, and VI
b. II and III
c. II, V and VI
d. III and VI

14. Bank statements provide information about all of the following, except
a. Bank changes for the period.
b. Errors made by the company.
c. Checks cleared during the period.
d. No sufficient fund checks.

15. In preparing a bank reconciliation, interest paid by the bank on the depositor’s account is
a. Added to the bank balance.
b. Added to the book balance.
c. Subtracted from the bank balance.
d. Subtracted from the book balance.

FINANCIAL ACCOUNTING AND REPORTING - PROBLEMS

Problem 1: On December 31, 2021, the Cash and Cash Equivalents account of Partridge Company shows the
following composition:
Petty Cash Fund 5,000
Traveler’s check 10,000
Cash in Savings deposit* 104,000
Manager’s check 23,000
Postage stamps 1,000
IOUs from the officers 3,000
Bank draft in a checking account with Allied Bank 70,000
Postal Money order 20,000
Deposits segregated to pay dividends 100,000

Securities: Date Acquired Maturity Date Amount

BSP T. Bills (1yr.) 1/30/21 01/30/22 40,000
BSP T. Bills (6mos.) 11/01/21 04/01/22 30,000
MM Funds (9mos.) 12/01/21 02/28/22 50,000

*Cash in Savings deposit includes P10,000 of compensating balances. It was noted that 40% of that amount
are legally restricted as to withdrawal.

1. How much is the amount of Cash and Cash Equivalents to be presented in the Statement of
Financial Position on December 31, 2021?
a. 218,000 c. 328,000
b. 238,000 d. 378,000

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CASH AND CASH EQUIVALENTS
FARAP-4401
Problem 2: Turtledoves Corporation's checkbook balance on December 31, 2021, was P8,000. In addition,
Turtledoves held the following items in its safe on December 31:
a. Check payable to Turtledoves Corporation, dated January 2, 2022,
not included in December 31 checkbook balance 2,000
b. Check payable to Turtledoves Corporation, deposited December 20,
and included in December 31 checkbook balance, but returned by
bank on December 30, stamped "NSF." The check was redeposited
on January 2, 2022, and cleared on January 7, 2022. 500
c. Check payable to Turtledoves Corporation, undeposited, dated May
950
1, 2021, included in December 31 checkbook balance
d. Check drawn on Turtledoves Corporation's account, payable to a
vendor, dated and recorded on December 31, 2021 but not mailed
until January 15, 2022. 1,000
e. Check drawn on Turtledoves Corporation's account, payable to a
supplier, dated January 3, 2022, was delivered and recorded on
December 30, 2021. 850

2. The proper amount to be shown as Cash in the Statement of Financial position on December 31,
2021 is
a. 6,400 c. 8,400
b. 9,350 d. 7,350

Problem 3: The December 31, 2020 trial balance of French Company included the following accounts:
Cash on hand P 1,000,000
Petty cash fund 40,000
Cash in bank at Metrobank 2,700,000
Cash in bank at Landbank – 60-day time deposit 4,000,000
BSP treasury bills - 30 days 6,000,000
● The Cash on hand included a customer postdated check of P200,000 and a postal money order of
P80,000
● The Petty cash fund included an unreplenished petty cash vouchers for P4,000 and an employee check
for P6,000 dated January 6, 2021.
● A check for P400,000 was drawn against Metro bank account, dated January 31, 2021, delivered to
the payee and recorded December 31, 2020.
● The Landbank time deposit is set aside for the acquisition of Land to be used as a factory site.

3. What total amount of Cash and Cash Equivalents should be reported in the Statement of Financial
Position on December 31, 2020?
a. 3,930,000 c. 9,930,000
b. 9,530,000 d. 13,930,000

Problem 4: The Callingbird Company’s ledger showed a balance of P363,000 in its Cash and Cash Equivalents
account on December 31, 2021, the breakdown of which is as follows:

Petty Cash Fund* 5,000

Payroll Account – BPI 60,000
Restricted foreign bank account 25,000
Treasury bill, due 3/30/22 (purchased 12/31/21) 70,000
Treasury bill, due 1/31/22 (purchased 5/1/21) 40,000
Demand deposit – PNB (overdraft) (20,000)
Cash in Bank – BDO** 90,000
Cash set aside for the acquisition of equipment to
be disbursed 4 months after reporting date 30,000
Bond Sinking Fund 45,000
DAUD/DAIF customer’s check 10,000
Cash Surrender Value 8,000

* Including expense receipts of 1,000, IOUs of 500 and Employee’s check dated Dec. 30, 2021 of P200.
** Net of undelivered check payable to creditors of P30,000.

4. How much is the amount of Cash and Cash Equivalents on December 31, 2021?
a. 253,300 c. 233,300
b. 253,500 d. 283,500

Problem 5: Goldrings Company established a petty cash fund of P5,000 on July 1, 2020. At the end of the month,
the count of cash on hand indicated that P675.40 remained in the fund. A review of the petty cash vouchers
disclosed the following expenses had been incurred during the month:
Office supplies – P341.60; Postage – P780.00; Representation – P1,000.00; Transportation – P 1,321.40;
and Miscellaneous – P837.60

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CASH AND CASH EQUIVALENTS
FARAP-4401
5. The above information indicates that there is a
a. Cash shortage of 44.00
b. Cash overage of 44.00
c. Cash shortage of 1,394.80
d. Cash overage of 1,394.80

Problem 6: If a petty cash fund of Gee Company is established in the amount of P2,500, and contains P2,000 in
cash and P450 in receipts for disbursements when it is replenished,

6. The journal entry to record replenishment should include credit to the following accounts
a. Petty Cash, 450
b. Petty Cash, 500
c. Cash, 450; Cash Over and Short, 50
d. Cash, 500

Problem 7: The Petty Cash Fund of Swan Company has an imprest balance of P20,000. The following items are
found in its drawer on December 31, 2021:

Currencies and coins 4,700

Vouchers for expenses during the year:
Office supplies 1,500
Postage stamps 500
Transportation 100 2,100
IOU notes of several employees all dated December 2021 2,500
Unused postage stamps 100
Replenishment check drawn by the Company payable
to the order of petty cash custodian 1,500
Check received from customers representing sales for the month
of December 1,700
Check received from Leni, an officer, dated December 30, 2021 2,000
Envelope containing contributions from employees
for field trip in Star City 5,000

7. What is the correct amount of petty cash fund on December 31, 2021?
a. 4,700 c. 8,200
b. 6,200 d. 12,800

8. What is the amount of shortage/overage?

a. 400 short c. 7,200 short
b. 400 over d. 7,200 over

Problem 8: Mild Company prepares reconciliation of the bank and books balances on a regular monthly basis.
The December 31, 2021 reconciliation shows a balance per bank of P581,050, balance per books of P615,900,
outstanding checks of P84,300, deposits in transit of P120,000, interest earned on the bank balance of P1,250,
and service charges of P400.

9. How much is the correct cash in bank on December 31, 2021?

a. 616,750 c. 615,100
b. 616,570 d. 545,350

Problem 9: In preparing its August 31, 2021 bank reconciliation, Ladies Company has the following information:

Balance per bank statement, August 31, 2021 – P180, 500; Deposit in transit – P32, 500; Return of customer’s
check for insufficient funds – P6,000; Outstanding checks – P27,500; Bank service charges – P1,000.

10. What is the unadjusted cash balance per books at August 31, 2021?
a. 192,500
b. 185,500
c. 180,000
d. 173,500

Problem 10: Lords Company keeps all its cash in checking account. An examination of the company’s accounting
records and bank statement for the month ended December 31, 2021 revealed the following information: Cash
balance per bank statement – P846,900; Cash balance per ledger – P852,400.
A deposit of P95, 000 placed in bank’s night depository on December 29, 2021 does not appear on the bank
statement. The bank statement shows that on December 26, 2021, the bank collected a note for Lords and
credited the proceeds of P93,500 to the company’s account. The proceeds included P3,500 interest, all of which
Lords earned during the current accounting period. Lords has not yet recorded the collection.Checks outstanding
on December 31, 2021 totaled P27,000.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
CASH AND CASH EQUIVALENTS
FARAP-4401
Lords discovered that check no. 032759 written in December 2021 for P18,300 in payment of an account had
been recorded in the company’s records as P13,800. Included with the December 31, 2021 bank statement was
an NSF check for P25,000 that Lords had received from Leaping Company on December 20, 2021. Lords has not
yet recorded the returned check. The bank statement shows a P1,500 service charge for December.

11. The adjustment to the cash balance as of December 31, 2021 is

a. debit to cash of 93,500
b. credit to cash of 31,000
c. net debit to cash of 62,500
d. net credit to cash of 62,500
Problem 11: Piper Company had the following bank reconciliation as at October 31, 2021:
Balance per bank, October 31 P420,000
Add: Deposit in Transit P 80,000
Erroneous bank debit* 15,000
Bank service charge 5,000 100,000
P520,000
Less: Outstanding checks P 70,000
Credit memo 50,000 120,000
Balance per book, Oct. 31 P400,000
* Corrected in November

All reconciling items at October 31, 2021 cleared through the bank in November. Items for November are the
following: Deposits in transit and Outstanding checks were P 40,000 and P60,000, respectively. Proceeds from
bank loan was P 20,000 and a debit memo of P8,000 are not yet recorded on the depositor’s books. Total Bank
receipts was P300,000; Total Bank disbursements was P250,000.

12. What is the amount of Adjusted Cash Receipts in November?

a. 260,000 c. 290,000
b. 275,000 d. 245,000
13. What is the amount of Adjusted Cash Disbursements in November?
a. 240,000 c. 237,000
b. 225,000 d. 222,000
14. How much is the Adjusted Cash in Bank?
a. 480,000 c. 445,000
b. 450,000 d. 400,000

Problem 12: In reconciling the Cash in Bank of Drummer Company with the bank statement balance for the
month of November 2021, the following data are summarized:
Book receipts- November P800,000
Bank receipts - November 900,000
Credit memo for note collection:
October 60,000
November 75,000
Credit memo for November bank loan 100,000
Deposit in transit for October 120,000
Erroneous bank credit in November corrected in December 25,000
Erroneous bank credit in October corrected in November 50,000
Erroneous book credit in November corrected in December 5,000
Erroneous book credit in October corrected in November 10,000
Debit memo for service charge - October 6,000
Debit memo for service charge – November 8,000
Erroneous book debit – November corrected in December 20,000
Erroneous bank debit – November corrected in December 65,000
Book disbursement – November 600,000
Bank disbursement – November 700,000
Outstanding check – October 80,000

15. What is the adjusted amount of receipt for the month of November?
a. 800,000
b. 825,000
c. 885,000
d. 900,000

16. What is the adjusted amount of disbursement for the month of November
a. 500,000
b. 515,000
c. 597,000
d. 600,000

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CASH AND CASH EQUIVALENTS
FARAP-4401
AUDITING PRACTICE
Significant Business Processes: Order to Cash and Purchase to Pay
(Formerly Revenue and Receipt and Purchasing and Disbursement Cycles)

PROBLEM 1: (COMPOSITION, CASH COUNT)

You were assigned to audit the cash and cash equivalents account of your audit client, Luzon Corp. for the
period ended December 31, 2020. As a result of your investigations, you were able to gather the following
from the Corp.’s trial balance:
Petty cash fund 25,000
Cash on hand – undeposited collections 1,250,000
Cash in bank – BPI Current Account No. 2099 3,780,000
Cash in bank – BDO Current Account No. 22013 (160,000)
Cash in bank – UCPB Savings Account No. 02312 3,500,000
Other Items 2,000,000
Audit notes:
1. The petty cash fund consisted of the following items as of December 31, 2020 (count date):
Currency and coins P3,800
Employees’ vales/IOUs duly supported by promissory notes
signed by employees concerned 2,500
Currencies/money in an envelope marked “collections for
Christmas Party” with names attached 5,200
Unreplenished petty cash expense vouchers 3,250
Check drawn by Luzon Corp., payable to the petty cashier 11,200
Unused postage stamps 900
Personal check of Aljun Li, officer, payable to the account of
the Luzon Corp. 3,000

2. Cash on hand represents undeposited collections as of December 31, 2020 and includes the following
items:
a. Another customer’s check for P125,000 returned by bank on December 28, 2020 due to
insufficient fund but subsequently redeposited and cleared by the bank on January 2, 2021.
b. Another customer’s check for P56,000 dated January 5, 2021, received on December 29, 2020.
c. A customer check for P99,000 dated June 1, 2020 received on the same date, still on hand
and yet to be deposited to the bank.
d. Postal money orders and bank drafts received from customers, P100,000.

3. Included among the checks drawn by Luzon Corp. against the BPI Current Account No. 2099 and
recorded in the cash disbursement journal in December 2020 are the following:
a. Check written on December 29, 2020 dated January 2, 2021, delivered to payee on
December 29, 2020, P94,000.
b. Check written and dated December 29, 2020 and delivered to payee on January 2, 2021,
P72,000.
c. Check dated April 1, 2020 amounting to P90,000 still outstanding by December 31, 2020 as
per the client-prepared December bank-reconciliation statement.

4. The credit balance in the BDO Current Account No. 22013 represents checks drawn in excess of the
deposit balance. These checks were still outstanding at December 31, 2020.

5. The UCPB Savings Account No. 02312 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 items included:

a. P1.2M time deposit with BPI which was purchased on November 1, 2020 and shall mature on
November 1, 2021 (This deposit is not allowed to be pre-terminated as per the signed
agreement with the bank)
b. P500,000 money market placements purchased December 1, 2020 and shall Mature on March
1, 2021, and;
c. P200,000 investment in ordinary shares designated as FVPL, purchased on November 15,
2020, expected to be sold by February 14, 2021.
d. P100,000 investment in redeemable preference shares purchased on December 1, 2020 with
a mandatory redemption date on February 28, 2021.

Determine the audited balances of the following:

1. Petty cash fund
2. Petty cash shortage/overage
3. Cash on hand – undeposited collections
4. Total cash in banks (excluding undeposited collections) to be included as cash and cash
equivalents in the current asset section of the balance sheet
5. Total Cash and cash equivalents to be reported in the 2020 balance sheet

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CASH AND CASH EQUIVALENTS
FARAP-4401
PROBLEM 2: (CASH COUNT)
Your petty cash count conducted on January 4, 2021 in the presence of Jon Tan, the custodian of your client,
Visayas Inc. revealed the following:

Coins and currency P 2,900

Paid vouchers:
12/27 Transportation P 550
12/27 Gasoline 420
12/28 Office Supplies 590
12/29 Postage stamps 300
12/30 Employee IOU (with promissory note) 500
1/2 Office repairs 375
1/3 Representation expense 325 3,060
Officer’s check returned by bank marked “NSF” 1,000
Check drawn by company to the order of Jon Tan 3,000
Unused postage stamps 300
12.28 Petty cash receipt voucher for the return of
a travel advance. A total travel advance of P1,500
was made in October and fully replenished in
November for P1,500.* 500

The petty cash fund had an imprest balance of P10,000 as reflected in the company’s general ledger.
*The company does not maintain a separate travel fund, instead, the company makes use of the petty cash
fund for travel expenses. After your cash count, you were able to confirm that the P500 cash was subsequently
deposited to the company’s current account.

Requirements:
1. What is the petty cash shortage?
2. What is the correct/adjusted balance of the Petty Cash Fund account as of December 31,
2020?

PROBLEM 3: (CASH COUNT)

A count of the undeposited receipts under the custody of Mr. Gor, the cashier of Macario Corp., on
September 30, 2020 showed the following composition:

Currency and coins P24,620

Unused postage and documentary stamps 220
Employee IOU’s (supported by promissory notes) 2,000
Other disbursement vouchers paid from cash receipts 1,600
Checks:
Date Payee Drawer
3-24-20 Macario Corp. Rita Co. (Customer) 2,000
9-20-20 Macario Corp. Tams Co. (Customer) 4,700
9-27-20 Macario Corp. Jonli Inc. (Customer) 3,920 **
9-30-20 MERALCO Macario Corp. 5,700
10-2-20 Macario Corp. X24E Co. (Customer) 1,500
Total per count P 44,760
**Marked NSF by the bank (replaced by the customer and redeposited on October 5)

Assuming the cashier’s accountability is P33,540 per the client’s records as of September 30:

1. What was the amount of shortage/overage on September 30?

2. What is the adjusted balance of undeposited collections as of September 30?

PROBLEM 4: (BANK RECONCILIATION; PROOF OF CASH)

You obtained the following information pertinent to the current account of Park Corp. during your examination
of its financial statements for the year ended December 31, 2020.

Audit notes:
a. November items:
● The bank statement on November 30, 2020 showed a balance of P1,872,000.
● Among the bank credits in November was customer’s note for P600,000 collected for the
account of the company which the company recorded in the cash receipts journal in December.
● Included in the November bank debits were cost of checkbooks amounting to P7,200. Likewise
included in the November bank debits was a P240,000 check which was charged by the bank
in error against Park Corp.’s account. Bank errors are usually automatically corrected the
following month.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
CASH AND CASH EQUIVALENTS
FARAP-4401
● November deposits in transit amounted to P480,000 and outstanding checks totaling
P1,050,000, 30,000 of which has been certified by the bank in November.

● A P195,000 customer collection in November was recorded in the books at P159,000. This was
discovered and corrected in the cash receipt journal in December.
b. December items:
● The bank statement for the month of December showed total credits of P4,496,000 and total
charges of P1,724,000.
● The company’s books, on the other hand, showed total December debits of P4,413,600, total
credits of 2,443,200. The December cash balance per books was at P2,913,600.
● A December credit memo for bank loan proceeds amounted to P800,000 was among the
year-end bank credits.
● Bank debit memos for December were: No. 121 for service charges, P9,600 and No. 122 on a
customer’s returned check marked “NSF” for P144,000.
● The total bank credit and the total bank debit for the month of December both included a
P23,000 customer check. This check bounced in December but subsequently redeposited and
cleared the bank also in December. Examination revealed that the return and redeposit were
no longer recorded in the books since they will have no effect on the ending cash balance.
● A P95,000 collection check of Perk Corp. was erroneously credited by the bank to the
company’s account in December.
● On December 31, 2020 the company authorized the bank to automatically settle a P360,000
note payable to a supplier. The note matures on January 5, 2021. The company treated this
note as part of its disbursements although the bank was able to settle the note only at maturity
date.

● A check for P11,880 was recorded in the company’s cash disbursements books in December
as P118,800. This error was discovered by the company in December and the necessary
correction has already been made to the cash account in the general ledger also in December.
Requirements:
1. How much is the undeposited collections as of December 31?
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 5: (BANK RECONCILIATION; PROOF OF CASH)

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

August 31 September 30
Customers’ direct deposits credited by the
bank (recorded per books the following month) 55,000 72,000
Bank loan and interest payments 120,000 80,000
Customer’s NSF checks, recorded in the books the following month 15,000 6,000
Customer’s NSF check returned by the bank in September,
redeposited also in September. Examination revealed that the
company recorded the return and redeposit per books. 4,400
Undeposited collections 89,000 ?
Outstanding checks 122,000 ?
Total credits per bank statement 1,819,000
Total debits per bank statement 1,618,000
Total debits per books 1,795,000
Total credits per books 1,800,000

Additional information:
a. A P25,000 collection was erroneously recorded twice in the books in September, the company
discovered the error and corrected the same in September.
b. A P30,000 check disbursement was recorded in the books as P3,000 in August. The correction was
made in September.
c. The bank erroneously charged the company in August for a disbursement of Spin Corp. for the
amount of P40,000. The bank corrected the error in September.
d. A September collection was correctly record in the books at P21,000. This was erroneously credited
by the bank at P12,000. The error was discovered and immediately corrected by the bank also in
September.
e. The unadjusted balance per book in August was at P698,000. The unadjusted balance per bank
in September was at P785,000.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
CASH AND CASH EQUIVALENTS
FARAP-4401
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?

PROBLEM 6: (RAP; INTERNAL CONTROLS, TEST OF CONTROLS, SUBSTANTIVE TESTING)

1. Cash is the most inherently risky among assets in the perspective of the auditor. This is mostly associated
to the fact that cash has the highest risk of misappropriation either from within or outside the entity.
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
2. Which of the following is not consistent with the requirements of the imprest system with regard to
protecting receipts from possible loss due to misappropriation?
a. Requiring customers, where possible, to pay through checks.
b. Requiring the company’s personnel who receives the check first to automatically
restrictively endorse check collections.
c. Requiring the treasury department to prepare monthly bank reconciliation statements to
reconcile bank records against the company’s books.
d. Requesting customers, where possible, to remit payments directly to the bank.

3. Which of the following is not a universal rule for achieving strong internal control over cash receipts?
a. Separate the cash handling function, record keeping function and regular bank
reconciliation functions.
b. Decentralize the receiving of cash as much as possible.
c. Deposit each days’ cash receipts by the end of the day.
d. Where collections are made through cash and not through checks, cash receipts should be
reconciled with the prenumbered official receipt at the end of the operating day.

4. As payments are received, one mailroom employee is assigned the responsibility of prelisting check
receipts and preparing the deposit slip prior to forwarding the check 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.

5. 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.

6. Which of the following is not consistent with the requirement of the imprest system with regard to
the internal control measures in handing and processing disbursements?
a. All disbursements, without exception, should be made through checks.
b. For immaterial disbursements, the company may be allowed to use undeposited
collections.
c. Documents in the voucher package (e.g., sales invoice, purchase order, receiving
reports) should be automatically cancelled once disbursement checks are signed.
d. Checks should be released immediately to the payees, preferably by the one who signed
the checks last.

7. 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.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
CASH AND CASH EQUIVALENTS
FARAP-4401
8. 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

9. 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.

10. 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 cash withdrawals from checking accounts.
d. Low average balance compared to high level deposits.

11. 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.

12. 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.

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. Which of the following is correct regarding cash counts?

a. Where the accountability is the petty cash fund balance, accommodated checks are
considered not valid support of NSF, post-dated or stale as of the count date.
b. Where the accountability is the undeposited collection balance, customer collection
checks are considered valid support even if they are NSF, post-dated or stale as of the
count date.
c. Where the accountability is the petty cash fund balance, any evidence to claim that cash
was used to pay certain disbursements (e.g. postage stamps) shall be considered valid
support.
d. Where the accountability is the undeposited collection balance, any evidence to claim
that collection was used to pay certain disbursements (e.g. postage stamps) shall be
considered valid support.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
CASH AND CASH EQUIVALENTS
FARAP-4401
17. 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.

18. 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.

19. 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.

20. 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.

21. 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 and 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.

- END -

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