CHAPTER 11 AUDIT OF CASH BALANCES INTRODUCTION Since cash generally-has a higher degree of inherent risk, more audit time is devoted to the audit of the account than is indicated by its peso amourtt. The ; 2mount of cash flowing in and out of the cash account is frequently larger than for any other account ‘in the financial statement."Furthermore, the susceptibility of cash to defalcation is greater than for other types of assets because most other assets must be converted to cash to make them usable. As discussed in the preceding chapters, the fo] lowing misstatements which result in the improper payment of or failure to receive cash may be uncovered through the tests of controls and substantive tests of transactions. Failure to bill a customer is Billing a customer ata price lower than called for by company policy Abstraction of cash receipts from customers before they are recorded Duplicate payment of'a vendor's invoice Improper payments of officers’ personal expenses Payment for merchandise or goods that were not received Payment to an employee for more hours than:he or she has worked Payment of interest to a related party for an amount. far exceeding the going rate RADA OY = The first three misstatements could be uncovered as part of the audit of the revenue and cash receipts cycle, the next three in the audit of t payment cycle, and the last two in the tests of the payroll and Pp the financing and investing cycle, respectively. he acquisition and ersonnel cycle and _ Entirely different types of misstatements are normall substantive test of details of balances. Examples are a. ‘Cash received by the client subsequent to the statem date but recorded as cash ore in the current year b. Deposits recorded as cash receipts near the end of the year, deposited i bank in the same month but still reported as a deposit in Atos in en the reconciliation a bank Understatement of the outstanding checks in the bank d. Payments on notes payable debited directly to butnot entered in the client's records ly discovered in applying lent of financial Position y teconciliation the bank balance by the banksAudit of Cash Balances _323 The appropriate methods for discovering the preceding misstatements iy ae the client's bank reconciliation will become clearer as we proceed. Att ee and it is important only that the reader distinguish between tests of controls i : substantive tests of transactions that are related to the cash account and tests that determine whether the book balance reconciles to the bank balance. To blend the conceptual and procedural aspects of substantive tests for cash balances as well as for other’accounts, the audit program presented is keyed to and discussed in the context of the financial statement assertions discussed later. AUDIT OBJECTIVES AND PROCEDURES An audit program of representative year-end substantive testing procedures in the examination of cash is presented in Figure 11-1. These procedures are discussed in the remainder of this chapter. Figure 11-1: Substantive Testing of Cash Assertions Audit Objectives Audit Procedures 1. Existence or occurrence A. Todetermine whether Cash ['1. Obtain analysis of cash exists at year-end and cash- balance and reconcile to the related transactions occur general ledger. within the year.” 2. Confirm bank balances as of B. To determine that all cash statement of financial position balances of the client are date. reflected on the statement of | 3. Perform cash count financial position at year- procedures for cash on hand. end 4. ~ Obtain (prepare) bank reconciliations as of the, statement of financial position date. 5. Trace all transfers occurring between banks near year- end. Completeness C. "To délermine whether all 6. ~ Obtain’a cetoff bank cash transactions are statement containing recorded in the proper transactions several days accounting period. «Subsequent to the statement of financial position date, Examine items returned with the cutoff bank ’statements, "7. Prepare proof of cash and Teconcile cash transactions occuring during a specified period as they are recorded by the bank and the client,324 Chapter 11 8. Verify the client's cutoff of cash receipts and cash disbursements. II. Rights and obligations D. To determine that cash 9, Review bank statements and balances are available for * the bank replies to use without restrictions or if confirmation letters, f with restrictions, properly : indicated in the statement of financial position. |v. Valuation or allocation E. To determine if cash is 10. Verify existence of cash in recorded and presented at banks under receivership, the proper amount. cash subject to court's restraining order, in foreign banks and in foreign currency. This is in addition to the foregoing procedures which will enable the auditor to verify proper valuation of cash. | V.__ Presentation and F. Todetermine whether cash | 11. Investigate any checks disclosure is presented in accordance Tepresenting large or unusuat applicable Financial payments to related parties. Reporting Standards. 12. Evaluate proper financial statement presentation and disclosure of cash. Discussion of Substantive Audit Procedures I. Obtain analysis of cash balance and reconcile to the general ledger. This schedule will typically list the bank, the account number, account type (current, savings, time deposit) and the year-end balance per books. This balance will then be traced and reconciled to the general ledger as necessary. 2. Confirm balances as of the statement of financial position date. A direct approach in proving existence of cash is to confirm amounts on deposit by communicating with financial institution officials. Figure 11-2 illustrates a standard bank confirmation form that may be used to this purpose. To assist the financial institution in completing ‘the form, information identifying accounts, loans and their balances are typed by the’ auditor. Other information such as additional accounts, loans, may be provided by the financial institution. Bank confirmation request should be. (a) sent to all banks in which the client has an account, (b) signed by the client, (c) mailed by the auditor, and returned directly, to the auditor,Audit of Cash Balances 325 Figure 11-2: Confirmation Form Financial : Institution's Name and STANDARD FORM:TO CONFIRM ACCOUNT BALANCE INFORMATION «WITH FINANCIAL INSITUTIONS ORIGINAL. To be mailed to accountant Eastem Bank and TrustCo, ‘The Seaview Corporation CUSTOMER'NAME We have provided to our accountants the following information as “of the close of business on December 31, 20X7,. regarding our deposit and foan balances. Please confirm the accuracy of the information, noting any exceptions to the information provided. 1 Intramuros, Manila. Address 5 the balances have been left blank, please completé this form by furnishing the balance in the appropriate space below.’ Although we do not request nor expect you to conduct a comprehensive, detailed search of your records, if during the process of Completing this confirmation additional information. about other ddepositand loan: accounts we may havé with you comes to your attention, please include such information below. Please use the enclosed envelope to retum the form directty to our accountants, 4._Atthe close of business on the ‘date listed above, our records indicated the following deposit balance(s) ACCOUNT NAME ___ACCOUNT NO. INTEREST RATE BALANCE® General Account 266-7850 None P90,0007 Payroll Account 266-7850: None 11,500 2. We ate directly liable tothe financial insiution for loans atthe dose of business onthe dal sted above as flows: ‘ACCOUNT DATETHROUGH "|. DESCRIPTION NO. DATE | INTEREST | . WHICH INTEREST OF DESCRIPTION | BALANCES | DUE RATE JS PAID. COLLATERAL, 56-8965T 4,000,000 | 6/15720x8. | 5% Y2ASROXT” [San Miguel Corp. ; Shares Credit Line 2,000,000 | se1i20x8 | - 6% 421re0X7 : . January 6,20%8 (Clients Authorized Signature) (ate) ‘The information presented above by the customer isn agreement wih our records. Althdugh we have not conducted a ‘comprehensive, detailed search of our records, no other deposit or oan accounts have come to our attention except as Noted below. . ne ‘Financial Insitubon Authorized Signature) Gontroler (Title) EXCEPTIONS AND/OR COMMENTS: January 31, 20x8 (Date). Please retum this form directly to our accountants: Jances are intentionally left blank if they are not available at the jared. Cruz & Cortel, CPAs 2775 Ayala Avenue Makati Cl326 Chapter II 3. Perform cash count procedures for cash on hand Existence of undeposited collections, petty cash funds and other funds may be verified by conducting a surprise count of these funds. Figure 11-3 illustrates a cash count sheet that the auditor may use. In conducting the cash count the auditor should follow these procedures: 1) Control all cash and negotiable instruments held by the client until all funds have been counted. : 2) Insist that the custodian of the cash be present throughout the count. 3) Obtain a signed receipt from the custodian on return of the funds to the client. 4) Ascertain that all undeposited checks are payable to the order of the client either directly or through endorsement. Figure 11-4 illustrates the working papers to determine the adjusted balance of Petty Cash Fund. 4. Obtain (prepare) bank reconciliations as of the statement of financial position date, If client provides the auditor with the reconciliation of the balance per the bank statement at the statement of financial position date with the balance per the'company's accounting records, he should examine such in detail to satisfy himself that is has been properly prepared. A careful review of the client's reconciliation is important because a cash shortage may be concealed by omitting a check from the outstanding checks list or by purposely making an error in addition on the reconciliation. The examination of the client-prepared bank reconciliation should also include: a. Tracing bank balances to bank confirmation responses b. Verifying the validity of the reconciling items c. Scanning the bank statements for erasures and alteration Figures 11-5, 11-6, and 11-7 illustrate the forms of bank reconciliation. The forms most frequently used by auditors are those shown in Figure 11-5 (Bank to Books) and Figure 11-7 (Adjusted balances). ' ;Audit of Cash Balances 327 Figure 11-3: ‘Cash Count Sheet Company ‘Name of Fund ‘Cash Count Date [sacs] “Denomination Guantity Amount Total SS Prb.00 P ics * 20.00 | 1 FRACTIONAL DENOMINATIONS 0.05 TOTAL BILLS AND FRACTIONAL DENOMI TOTAL aus INATIONS | Greeks sad PC er depos fouchars not yet replenished Advances or .0.U"s. Others ‘Amount of Fund Per Count 1 ‘Ammount of Fund Per Books or Reoai [Diteronoe,fany nn —— | hereby ently that te sbove fund of P_____ was cae fi my presence on OY a pi ———____-. 20___ at _______AMIPM ‘and the same was returned to me intact, There are no other funds forwhich | am accountable for except as noled below: Other Funds: (Simuttaneousty counted or physically controlled) (Signature of Cashier) Figure 11-4: Adjusted Balance of Petty Cash Fund X Company Petty Cash Fund 12/31/20X7 Balance per ledger : 3 Pxx ‘Add (Deduct) Adjustments _ q AJE (1) to take up unreplenished expenses (x) (2) to take up advances to employees (xx) Balance as adjusted Px328 Chapter 11 Figure 11-5: Bank Reconciliation Statement (Bank Balance to Book Balance Method) X Company Bank Reconciliation Statement December 31, 20X7 Balance per bank statement Pxx Add: Book debits not yet credited by the bank .g., undeposited collections) Pxx Bank debits not yet credited by the company (e.g., service charges for the month of December, NSF |_checks retumed in December) Total ‘Whe Less: Book credits not yet debited by the bank (e.g, outstanding checks) Bank credits not yet debited by the company (é.g., proceeds of note ‘collected by bank) Balance per books Figure 11-6; Bank Reconciliation Statement (Book Balance to Bank Balance Method) Bibs X Company : Bank Reconciliation Statement December 31, 20X7_. .- Balance per books Rxx ‘Add: Book credits not yet debited by the bank (e.g., outstanding checks) Bank credits not yet debited by the company (e.g., proceeds of note collected by bank) Pxx XX Total Less: Book debits not yet credited by the bank {e.g., undeposited collection) Bank debits not yet credited by the company (e.g., bank charges for the month of December, NSF checks retumed in December) . Balance per bankAudit of Cash Balances 329 Figure 11-7; Bank Reconciliation Statement (Adjusted Balances Method) X Company Bank Reconciliation Statement 3 December 31, 20X7 Unadjusted balance per bank - 4 Add: Book debits not yet Credited by the bank (€.9./undeposited collections)! _'\ Less: Book credits not yet debited by the bank (eg., outstanding checks) | Adjusted bank balance Unadjusted balance per books cE Add: Bank credits not yet debited by the company (.g., proceeds of note collected by.bank) Less: Bank debits not yet credited by the company (e.g. bank charges) Adjusted book balance BEE |: 5. Figure9.8 —_Kiting Trace all transfers occurring between banks near year-end. Traciig bank. -transfers is an effective procedure to disclose overstatement’ of cash balances: resulting from kiting. Kiting is an irregularity. involving transfer of cash. between banks, check drawn on one bank.is deposited in another, several days (called the float period) usually pass before the check clears the bank on which it is drawn. During the period, the amount of the check is included in the balance on deposit at both banks. The bank balances are temporarily overstated to conceal a cash shortage or meet short-term cash needs. Figure 9.8 illustrates kiting. Kiting can be prevented by segregation of functions; it can be detected by (a) obtainirig and using a bank cutoff statement and as mentioned (b) tracing bank transfers. Metrobank Equitable PCI Bank | Date Description Book Bank Book Bank ~_20X6 : ‘Dec 30__| Bank transfer not recorded on the books 100,000 —— ee 1 transfer on the books 100,000 Jan3 Record bank ‘on y mriinnon Jan4 Bank transfer clears bank drawn on : (100,000)* 330 Chapter N 6. Obtain a cutoff bank statement containing transactions several days subsequent to the statement of financial position date. A cutoff bank statement is a statement covering a specified number of business days (usually 7 to 10) following the end of the client's fiscal year. This ‘statement should be sent directly by the bank to the auditor. Upon receipt of the statement, the auditor should (a) Trace all prior year dated checks to the outstanding checks listed on the bank reconciliation. (b) Trace deposits in transit on the bank reconciliation to deposits on the cutoff statement. (c) Scan the cutoff statement and enclosed data for unusual items. 7. Prepare proof of cash and pcdnsile cash transactions occurring during a specified period as they are recorded by the bank and the + client. 5 A proof of cash is a simultaneous reconciliation of bank transactions and balances with corresponding data per books for a "specified time period.. A proof of cash is a substantive test that is generally prepared only when internal control over the recording of cash receipts and disbursements is considered weak. This is essentially a fraud detection procedure which may be used for the last month of the year or for selected months during the year. : Figures 11-9, 11-10, and 11-11 illustrate the Proof of Cash working papers. iAudit of Cash Balances. 331 Figure 11-9: Proof of Cash or Reconciliation of Receipts and Disbursements (Bank Balance to Book Balance Method) X Company Proof of Cash For the month ended December 31, 20X7 Nov. 30 Balance December Receipts Dec. 31 Balance Balance per bank statement Pxx, Prx Disbursements. Prxx Pxx [ Add (Deva) Reconcing tems 1. Deposit in transit (received by the bank in the succeeding month) November 30 December 31 4. (x) Xxx 2. Outstanding checks (paid by the bank in the succeeding month) November 30 December.31 (x) Gx) x (x) 3. Bank charges (retorded by the company in the suoceeding month): November December x 3) 4. Notes collected by bank (recorded by the Company in the succeeding month November December (a) (a) '. Check of anather company erroneously charged by the bank (corrected in the following month) November December (@) (x) (ex) 6. Deposit another company erroneously credited by the bank (corrected in the following month) November f December (a) (ox) Balance per books RE332. Chapter | Figure 11-10: Proof of Cash ‘ (Book Balance to Bank Balance Method) [= X Company Proof of Cash For the month ended December 31, 20X7 Nov. 30 December Dec. 31 : Balance Receipts Disbursements _ Balance _ Balance per books . PX Pxx Pxx Prxx Add (Deduct) Reconciling Items 1. Deposit in transit (received by the bank in the succeeding month) November 30 : (x) xx December 31 (x) (x) . Outstanding checks (paid by the bank in the succeeding month) November 30 xX : x December 31 (&) x 3. Bank charges (recorded by the company in the succeeding month) November (xx) (xx) December . x Notes collected by bank (recorded by the company in the succeeding month) November x (xx) December “ x xK Check of another company erroneously charged by the bank - (corrected in the following month) November (xx) x December XK Deposit of another company erroneously credited by the bank (corrected in the following month) November December Balance per bank statement ie (x) - a (xx) 2 B| ® ek B| x RbAudit of Cash Balances 333 Figure 11-11: . Proof of Cash (Adjusted Balances Method) ; X Company Proof of Cash For the month ended December 31, 20X7 Nov. 30 December fe 31 Balance: Receipts Disbursements’ _ Balance Unadjusted book balance Pax Pxx re ‘Add (Deduct) Adjustments | Proceeds of note collected by bank (recorded by the company in the succeeding month) November 30 x (xx) December 31 * = Bank charges (recorded by the company in the succeeding month) November (x) December — Adjusted book balance Pex Px Pxx BBLS Unadjusted bank balance Pxx Add (Deduct) Adjustments Deposit in transit (received by the bank in the succeeding month) November * (xx) iy December x 4 eC Outstanding checks (paid by the in the succeeding month) November 30 (xx) (ox) December 31 " x (xx) Check of another erroneously charged by the bank (corrected in the following month) November x (xx) December (x) x Deposit of another company erroneously credited by the bank November December ‘Adjusted bank balance Elz334 Chapter 11 t ‘ h disbursements. 8. Verify the client's cutoff of cash receipts and cas! ‘ial position date Ifa cash count can not be done on the statement of Aiea ‘he aulitae to verify the accuracy of the client's cutoff of ca ice the depo: = onciliation to the ¢an trace the deposits ii i end bank reconciliation sposits in transit on the year credits on the bank statement on the first busine : a To ensure an accurate cutoff of cash disbursement, a ae non determine the number of the last check prepared on eac! ” 7 Il checks ny the statement of financial position date and verify whet ne th tne to this number have actually been mailed. For cash rer tea mae tes should verify the number of the last official receipt an les invoice used on the statement of financial position date. 9. Review bank statements and banks' replies to confirmation letters. The auditor should review any bank overdrafts and-note the existence of any funds that may be subject to withdrawal restrictions in order to determine the effect(s) (if any) on financial statement presentation. 10. Verify existence of cash in bank under receivership, cash in foreign banks or in foreign currency. This can be done through examination of minutes, loan agreements and confirmations. 1 - Investigate any checks representing large or unusual payments to related parties. Any large or unusual’checks payable to directors, officers, employees, affiliated companies should be carefully reviewed to’ determine if whether the transactions were properly authorized, recorded and adequately disclosed in the financial statements, 12. Evaluate proper financial Statement presentation and disclosure of cash. Review financial statements to make sure (a) material savings accounts and separately from cash in the bank, (b) cash restricted to certain uses and i te com adequately disclosed, and Penang pele ae (c) bank overdrafts are included as current liabilities, certificates of deposit are disclosed >Audit of Cash Balances 335 Ilustrative Audit Case 9.1: Petty Cash Fund and Undeposited Collections Lina Reyes is the cashier of the Luzon Glass Company. AS representative of the Santos, Tan and Associates, CPAs, you were assigned to verify her cash on hand in the: morning of January 4; 20X8. You. began to count at 9:00 A.M. in the presence of Miss Reyes. In the course of your counting, you found currencies in paper bills and coins together with checks, vouchers and other items, which are mentioned below: » Bills 9 one hundreds, 25 fifties, 50 twenties, 120 tens Coins i P5.00- 4rolls and 5 loose (50 pieces to a roll) 1,00- 8 rolls and 15 loose (100:pieces to a roll) 0.25- 2rolls and 2 loose (500 pieces to a roll) 0.10- 3 rolls and ...40 loose (500 pieces to a roll) 0.05 - 2 rolls i (400 pieces to a roll) Checks Maker Date Payee i Amount Rose Manalo, 12/23/X7 Luzon Glass Co. P600 Asst. Manager : Miss L. Reyes, 12/26/X7 Luzon Glass Co. 400 Cashier : LO.U.s A. David, Janitor 12/20/X7 P350. R. Tirao, Clerk 42i22ix7__ 2 260 Pedro Munar, 12/24x7 150 Bookkeeper Petty Cash Vouchers for Replenishment Payee Date Account Charged Amount L. Cruz, Messenger A2I6IXT Advances to Employees P100.00 Rosario & Co. 42M 8/X7 Supplies 145.00 Victory Liner 42/1 8X7 Freight-in 182.50 Bureau of Posts (stamps) 421 8/X7 Supplies 300.00, A. Vallo, Carpenter 42/20/X7. Repairs 450.00 B. Tello 42121X7. Miscellaneous Expense 154.00336 Chapter 11. Your investigation also disclosed the following: 1. The balance of petty cash fund per books is P9,000. 2. Cash sales of January 2, 20X8 amounted to P8,650 per sales records, while cash receipts book and deposit slip showed that only P7,650 was deposited in the bank on January 3, 20X8. 3. The following employees' pay envelopes have been opened and the money removed. Each envelope was marked "unclaimed." N. Roy P332.50 G, Gloria 247.50 Required: - 1. Prepare working papers showing your cash count. 2. Prepare necessary adjusting journal entries without explanation. as of December 31, 20X7. 3. Determine the amount at which the Petty Cash Fund will be stated in the statement of financial position as of December 31, 20X7. Solution: Mustrative Audit Case 11-1. EXHIBIT 11-1 Requirement (1) Luzon Glass Company Cash Count Sheet January 4, 20X8 Denomination Quantity Amount P100.00 9 P.. 900.00 50.00 1,250.00 20.00 1,000.00 10.00 4,200.00 P5.00 P 4,025.00 1.00 815.00 0.25 250.50 0.10 154.00 0.05 40.00 TOTAL BILLS AND COINS « CASH ITEMS Checks for deposit Date Maker Payee 12123/X7 R. Manalo Luzon Glass Co. P 600.00 121261X7 L. Reyes Luzon Glass Co. + 400.00 1,000.00Audit of Cash Balances _337 Uneleished vouchers Pe Particulars 12N8X7 —_~ Rosario & Co, Supplies. P 145.00 12N8IX7 Victory Liner Freight-in 182.50 sane Bureayof Posts Supplies. 300.00 12120X7 A. Valo Repairs 450.00 120211K7 B. Tello Miscellaneous 154,00 1,231.50 Advances or IOUs nes F 12N6X7 LCruz P100.00° 121230K7 A. David 350.00 421201K7 R.Tirao 2 250.00 121240K7 P. Munar 150.00 £850.00 Total Amount of Fund Per Count P9,716.00 Total Amount of Fund Per Books or Receipts Petty Cash Fund per ledger 9,000.00 Unclaimed Wages per opened envelopes 580.00 Undeposited collection ‘ ; Cash sales, 1/27x8 8,650.00 | Less: Amounted deposited, 1/31X8 7,850.00 1,000.00, 10,580.00, Shortage ; Bt884.00) {Ely that the above fund of P9,716.00 was counted in my presence by (name of auctor) of Santos, Tan | ‘and Associates, CPAs on January 4, 20X8 at 9:00 AM and was retumed to me intact. _ hina Reyes JNA REYES Cashier \ nd tan Requirement (2) Adjusting Journal Entries 12/31X7 1. Supplies expense (145.00 + P300,00) * Freight-in Repairs and maintenance Miscellaneous expense Petty cash fund Advances to employees. Petty cash fund Cash in bank Salaries payable Accounts receivable — Cashier Petty cash fund PA45.00 182.50 154.00 1,231.50 850.00, 850.00 580.00 864.00 864.00Checks for Gepost Total cosn commie Less: Nostuns tems ~ Undesesies coliecions Balance tor Paty Cash Fund [lustrative Case 11-2: Andit of Cash and related Accounts using the Bazk Reconciliation Statement The following exemple illustrates the preparation of a bank reconciliation and Se required adjusting entries for the Bulacan Corporation for the month ended Ime 30, 20X7. The unadjusted cash balances are as follows: Cash balances per bank statement, June 30, 20X7 P249.223.00 Cash balance per company records, June 30, 20X7 248,758.80 The bank statement disclosed the following information: june 30. 1. A customer note for P24,000 plus P240 interest was collected on J 20X7. 2. Acustomer check for P2,762.80 was returned because of insufficient funds (NSF check). 3. The month service charge was P300.oa _Audit of Cash Balances 339 A review of the company records disclosed the following: 1." A deposit for P22,857.40 mailed to the bank on June 2 appear on the bank statement. : 2. Customer checks totaling P6,548.00 were on hand at the end of June awaiting deposit. pe 3. The following company checks were outstanding at the end of June: #862 P 1,923.80 #864 2,943.60 #865 5,265.00 4, Check #843 written for P1,824.00 in payment of a creditor account and included with the canceled checks in the. bank statement has been erroneously recorded as P384.00 in the company records. ‘9, 20X7 did not EXHIBIT 11-2 illustrates a bank reconciliation based on the foregoing data, EXHIBIT 11-2: Bank Reconciliation BULACAN CORPORATION Bank Reconciliation dune 30, 20X7 Balance per bank statement : P249,223.00 Add: Deposit in transit : P22,857.40 |_ Check on hand : 6,548.00 29,405.40 zi P278,628.40 Deduct: Outstanding checks #862 ‘ 1,923.80. #864 2,943.60 #865 5,265.00 Adjusted cash balance : Balance per company records “ 248,758.80 ‘Add: Note collected by bank 24,000.00 Interest on note . 240.00 24,240.00 - P272,998.80 Deduct: Bank service charge L P_ 300.00 NSF check retumed 2,762.80 Error in recording check #843 ~ 4,440.00 4502.80 | Adjusted cash balance é 268,496.00340 Chapter 11 .00 42 \ cas 3 24,240. ) 24,000.00, Notes Receivable (note collecied) ; 2. Miscellaneous Expense (bank service charge) 2, 7280 Accounts Receivable (NSF check) : $1440.00 Accounts Payable (error) ee 4,502.80 Cash: The entries adjust the cash account to P268,496,00, the amount te eee : as the Cash balance (along with any petty cash) on the June 30, of financial position. 2 PROOF OF CASH (FOUR-COLUMN RECONCILIATION) The independent certified public accountant responsible for auditing the company records normally will prepare more comprehensive bank reconciliation. This type of reconciliation, termed a proof of cash, incorporates the monthly'cash * receipts and payments to test the internal control over cash and provides additional evidence of the accuracy of the cash balance: Therefore; the proof of cash identifies the sources of differences between the company records and the bank statement (such as receipts and disbursements). There are several forms of a proof of cash (sometimes called a four-column reconciliation); again, our discussion focuses on the form that arrives at adjusted balances. This form of the © proof of cash begins with the reconciliation made the: previous month and accounts, in summary form, for all of the receipts and payments that have transpired during the current month. In essence, the proof of cash provides four separate reconciliations: Paine) 1. The reconciliation of the bank and book balance fo 2. The reconciliation of the receipts recorded by th month with the receipts recorded on the books, -.3. The reconciliation of the payments recorded by the ba: month with the payments recorded on the books, See ae caren 4. The reconciliation of the bank and book balances for the current month. r the previous month. ¢ bank for the current. Illustrative Audit Case 11-3: Audit of Cash using "Proof of Cash" The proof of cash for the Bulacan Corporation (illustrat: 5 requires the following in addition to that given in the presaiccne Case 11-2) 1. May 31, 20X7 bank balance : 2. Deposit in transit received by P272,348.40 the bank June 2, 20X7 : 24,803.00sks 2 : Audit of,Cash Balances *'341 3.. Total receipts recorded bythe bank iTte: é during June, 20X7 528,423.40 “4. Fotatpayments recorded by the bank during June, 20X7 551,548.80 5. May 31, 20X7 book balance 289,630.40 6. Outstanding checks on May 31, 20X7 7 #781 3,263.00 _ #782 4,258.00 7. Total receipts per books ' during June, 20X7 508,785.80 8.. Total payments per books * during June, 20X7 549,657.40 Solution: Mustrative Audit Case 11-3 The proof of cash for the Bulacan Corporation is shown in Exhibit 11-1. BULACAN CORPORATION Proof of Cash dune 30, 20X7_ : Reconciliation June June -] Reconciliation May 31, 20X7 Receipts Payments June 30, 20X7 Balance per bank 272,348.40 | _P528,423.40 | _P551,648.60 | P249,223.00 Deposit in transit: May_ 24,803.00 | (24,803.00) ‘June [722,857.40 22,857 40 Undeposited cash 6,548.00 6,548.00 Outstanding checks: May 31, 20X7 #781 (3,263.00) (3,263.00) #782 (4,258.00) (4,258.00) 30, 20X7 ee i TSE | (7,955.80) #864 2,943.60 [__(2,943.60) #865 a==5:285.00 | _ (5,265.00) | ‘Adjusted Balance 290,630.40 | PB33,025.80 | P554.160.20 | _P268496.00 | Belancé per books 289,600.40 | P508,785.80 |__P549,657.40 |= P248,758.60 C 300.00 (300.00) ‘June service charge | _ ENS check [2762.80 (2,762.80) [Eon rer ck 7aa0.00 | (1,440.00), : 24,240.00 24,240.00, Note and interest colecied 533,025.80 | __Pss4.160.20 | _P268.496,00 | [Adjusted Batence :342. Chapter 1 JMustrative Case 11-4: Cash and Other Items * ae nting records ©) the ‘The following information has been extracted from the accou ; Oracle, Corporation: t P-4,020 4. Cash on hand (undeposited sales receipts) 35,000 2. Certificates of deposit . - 1,000 3. Customer's note receivable 5 350) Sead balance in Fst Standard Bank cher account an 5, Reconciled balance in Prime National Bank checking acco 3 6. Balance in Rural Bank savings account 1, 350 7. Customer's postdated check F 600 8, - Employee travel advances 4.200 9. Cash in band sinking fund : 8,090 10. Bord sinking fund investments 430 41. Postage stamps. ° Required: account, and discuss the statement of Determine the balance in Oracle's Cash financial position treatment of any items not included as cash. ‘Solution: Wustrative Audit Case 11-4 Cash shall consist of Item 1. Cash on hand (undeposited sales receipts) P 1,020 5, Reconciled balance in Prime National Bank checking account g : 9,350 6, Balance Rural Bank savings account 8.560 Total cash on hand and in bank ‘ P18,930 The following items are not included in cash: Certificates of deposit ~ If matuty ofthe instrument i : time of purchase, this will be shown as Cash aa ee or less at the shown as Short-term Investments. . Otherwise, it will be Customer's note receivable will be shown among Ne : cased balance (negalve) In Fst Standard ote Reoalvabie : presented among Current Liabilities. checking account will be Customer's postdated check will be shown as Employee travel advances will be shown among Pe Acoouns Receivable. Cash.in bond sinking fund will be presented as Lon, fe Expenses. sant shking fund investment wl be presented as tong tere noe Postage stamps will be part of Prepaid Expenses, ng-term Investment. Item 2. Pp SeonAudit of Cash Balances 343 Illustrative Audit Case 11-5: Reconciliation of Bank and Company Cash Amounts’ The December 31, 20X7 bank statement for Miguel Corporation showed a P2,049.25 balance. On this date the company's Cash account, reflected a P325.60. overdraft. In reconciling these amounts, the following information is discovered: 1. Cash on-hand for undeposited sales receipts, December 31, 20X7, P130.25. . Customer NSF check returned with bank statement, P420.40. 3.. Cash sales of .P640.25. for the week ended December 18, 20X7. were recorded on the books. The cashier reports this amount missing, and it was not deposited in the bank. 1 4. -Note receivable of P2,500 and interest of P25 collected by the bank and not recorded on the books. : Deposit in transit December 31, 20X7, P350.00. 6. A customer check for P290.40 in payment of its account was recorded on the books at P940.20. 7. Outstanding checks, P2,040.55. Includes.a duplicate check of P70.85 to G. Violet, who notified Miguel that the original was lost. Miguel stopped payment on the original check and has already adjusted the cash account in the accounting records for this amount. w Required: . 1. Prepare a December 31, 20X7 bank reconciliation for Miguel Corporation. 2. Prepare any journal entries necessary by, Miguel Corporation to record the information from Requirement 1. Solution: Wustrative Audit Case 11-5 Requirement I i MIGUEL CORPORATION Bank Reconciliation December 31, 20X7 Balance from bank statement j P2,049.28 Add; Deposit in transit ee i) P ae 43035 deposited sales receipts, * __ 130.25, \ Cash on hand (undepo: mae Deduct; Outstanding checks (2,040.55)* edu : Adjusted cash balance