Good morning everyone, I will be one of your discussants for today. Our topic is Audit for cash.
We all know that applied auditing is a combination of Financial Accounting and Auditing Theory.
Before we go to the audit procedures let’s have a review about Cash and Cash Equivalents.
So what is cash?
Cash includes money and other negotiable instruments that is payable in money and acceptable
by the bank for deposit and immediate credit. It includes cash on hand, demand deposits and
other items that are unrestricted for use in the current operations.
Take note of the word unrestricted, it means it must be readily available for use or payment of
current obligations.
So the following items are included in cash:
A. Cash on Hand
Customer’s checks awaiting deposit
Undeposited cash collections
Traveler’s check
Cashier’s/Official/Treasurer’s/Manager’s Check
Postal money orders
Bank drafts
B. Cash in Bank
Current account/checking account/demand deposit/commercial deposit
Savings deposit
C. Cash Fund for Current Operations
Change Fund
Payroll Fund
Purchasing Fund
Revolving Fund
Interest Fund
Petty Cash Fund
Dividend Fund
Travel Fund
Tax Fund
So aside from knowing the cash fund for current operations it would be better if we should also
look into those funds that are for noncurrent operations. These include:
1. Pension Fund
Generally noncurrent investment but if the related liability is current, the fund is included as
cash
2. Preferred Redemption Fund
Noncurrent investment unless the preferred share has a mandatory redemption and if redeemable
3. Acquisition of property, plant and equipment
Always noncurrent even if expected to be disbursed next year
4. Contingent Fund
Noncurrent Investment
5. Insurance Fund
Noncurrent Investment
6. Sinking Fund
Noncurrent investment, if the related bonds payable is current, the fund is included as cash
We should take note that the classification of cash fund as current or noncurrent should be parallel to
the classification applied to the related liability.
Cash Equivalents
Cash equivalents are short-term and highly liquid investments that are readily convertible to cash and so
near their maturity that they present insignificant risk of changes in values because of changes in
interest rates.
These are the items that may qualify as cash equivalents:
Time deposit
Money market instrument or commercial paper
Treasury bills, treasury notes and treasury
Redeemable preference shares with mandatory redemption period.
Only if they were originally invested/acquired for three months or less before maturity.
If an item cannot be included as cash equivalent because it did not qualify the cut-off time period (three
months), it will always be classified as investments either short term or long term depending on the
period up to maturity.
What if the problem is silent? Let’s remember some points:
1.Treasury notes and bonds – assumed as noncurrent investment
2. Cash in money market account-cash and cash equivalent
3. Time deposit- cash and cash equivalent
And here are some issues in Cash and Cash Equivalents and how are we going to measure and treat
these items:
1. Cash- Measured at face value
2. Cash in foreign currency- Translated to Philippine Peso using the closing rate or spot rate at the
reporting date
3. Cash in closed bank/banks in bankruptcy
4. Measured at estimated realizable value and be included among noncurrent assets if the amount
recoverable is lower than face value
5. Bank overdraft- Negative balance in the cash in bank account
a. Different banks
-Current liability or may be netted against other bank if immaterial
b. Same bank
-Maybe netted against the account with positive amount but cannot be offset against
restricted account
Note: If the problem is silent , it should be treated as current liability !
6. Compensating Balance- The minimum checking account balance that must be maintained in
connection with a borrowing agreement with a bank.
Treatment:
a. Not legally restricted- part of cash
b. Legally restricted- it should be treated as “cash held as compensating balance” reported
either current or noncurrent asset depending on the term of the loan
Note: If the problem is silent with regard to compensating balance, it is assumed not legally restricted
7. Checks:
Undelivered/unreleased checks- reverted back to cash
Debit: Cash Credit: Accounts Payable
Stale Checks/checks long outstanding- checks not encashed by the payee with a relatively long
period of time. Under current Banking practices, checks are considered stale if not encashed
within 6months from its date.
Note: if it is material, it is treated as reversal of previous entry (Dr. Cash, Cr. A/P)
If immaterial, it is treated as Miscellaneous Income (Dr. Cash, Cr. Misc.Income)
Postdated checks- Checks dated after the reporting date
They are treated as cash
Let’s talk about concealment of cash shortages
Cash shortages are fraudulently concealed using numerous ways. Examples of concealing cash
shortages include, but not limited to the following:
1. Lapping- occurs when collection of receivable from one customer is misappropriated and
then concealed by applying a subsequent collection from another customer. It is made
possible when the incompatible duties of recording and cash custody are combined.
2. Kiting- occurs when cash shortage is concealed by overstating the balance of cash. It is made
possible by exploiting the float period ( the time it needs for a check to clear at the bank
where it was drawn).
3. Window Dressing- In a broad sense, this is a form of fraudulent financial reporting and not
primarily a method of concealing cash shortages. This occurs when books are not closed at
year-end and transactions in subsequent period are deliberately recorded in the current
period in order to improve the entity’s financial performance or financial ratios. This
fraudulent reporting is also called “cooking the books”.
The Imprest System is a system of controlling cash which requires all cash receipts to be deposited
intact and all cash disbursements to be made through checks. However requiring cash disbursements for
relatively small amounts ro be made through checks is inexpedient. Thus , it becomes necessary for an
entity to establish a petty cash fund.
