Tabunggao, Shane Josa Marie M.

ACCP302 AC32

AUDIT OF CASH AND CASH EQUVALENTS

SUMMARY
AUDIT OBJECTIVES:
- To determine whether cash exists at year-end and cash-related transactions occur within the
year.
- To determine that all cash balances of the client are reflected on the statement of financial
position at year-end.
- To determine whether all cash transactions are recorded in the proper accounting period.
- To determine that cash balances are available for use without restrictions or if with
restrictions, properly indicated in the statement of financial position.
- To determine if cash is recorded and presented at the proper amount.
- To determine whether cash is presented in accordance with generally accepted accounting
principle.
AUDIT PROCEDURES:
- Obtain analysis of cash balances and reconcile to the general ledger.
- Confirm bank balances as of the statement of financial position date.
- Perform cash count procedures for cash on hand
- Obtain (prepare) bank reconciliations as of the statement of financial position date.
- Trace all transfers occurring between banks near year-end.
- Obtain a cutoff bank statement containing transactions several days subsequent to the
statement of financial position date.
- Prepare proof of cash and reconcile cash transactions occurring during a specified period as
they are recorded by the bank and the client.
- Verify the client’s cutoff of cash receipts and cash disbursements.
- Review bank statements and bank’s replied to confirmation letters.
- Verify existence of cash in bank under receivership, cash in foreign banks or in foreign
currency.
- Investigate any checks representing large or unusual payments to related parties.
- Evaluate proper financial statement presentation and disclosure of cash.

CASH
Cash includes money and other negotiable instrument that is payable in money and acceptable
by the bank for deposit and immediate credit.
 Tabunggao, Shane Josa Marie M.
ACCP302 AC32

CASH ITEMS INCLUDED IN CASH

• Cash on hand – Includes undeposited cash collections and other cash items awaiting deposit
such as customer’s checks, cashier’s or manager’s checks, traveler’s checks, bank drafts, and money
orders
• Cash in bank – Includes demand deposit or checking account and saving deposit which are
unrestricted as to withdrawal.
• Cash fund – which are set aside for current purposes such as petty cash fund, payroll fund,
and dividend fund.
CASH EQUIVALENTS
According to PAS 7, paragraph 6, cash equivalents are short-term and highly liquid
investments that are readily convertible into cash and so near their maturity that they present
insignificant risk of changes in value because of changes in interest rates. The standards further states
that only highly-liquid investments that are acquired three months before maturity date can qualify as
cash equivalents.
Examples of cash equivalent:
• Time deposit
• Money market instrument or commercial paper
• Treasury bills, treasury notes, and treasury bonds
• Redeemable preference shares with mandatory redemption period.
Items Measurement
Cash Face value
Cash in foreign currency Current exchange date (balance sheet date)
Cash in foreign bank a. unrestricted – included in cash
b. restricted – cash restricted in foreign bank
Cash fund set for a purpose a. use in current operations – classified as current asset
b. use in non-current operations – classified as long–term
investments
Investments a. three months or less – cash equivalents
b. more than three months but within one year – marketable
securities or short term investments
c. more than one year – long term investments
Compensating balance a. not legally restricted – part of cash
b. legally restricted – reclassified as cash held as compensating
balance.
Undelivered checks Checks that is drawn and recorded but is not given to payees is
still cash of the entity.
Post-dated checks delivered Checks that sent to payees but has a date subsequent in the
reporting period is still part of the cash of the entity.
Bank overdraft a. different banks – current liability or may be netted against
other bank if immaterial; netted against other account if it is
part of cash management
 Tabunggao, Shane Josa Marie M.
ACCP302 AC32

b. same bank – maybe netted against the account with positive

amount but cannot be offset against restricted account.
Stale checks a. material – reverted to cash by accounts payable
b. immaterial – reverted to cash by miscellaneous income
IOUs Included as part of receivable
Equity securities Generally cannot be classified as cash equivalents because
equity securities do not have a maturity date (exception:
redeemable preference shares)
Callable preference shares Not classified as cash equivalents instead it is part of
shareholder’s equity on the part of issuer and part of long-term
investment of the holder.
No sufficient funds (NSF)/Drawn against Reverted back as part of receivables
uncleared deposits (DAUD)/ Drawn against
insufficient funds (DAIF) checks
Expense advances Receivable or prepaid expense
Temporary investments in shares of stocks Either FVTPL or FVTOCI but NEVER to be included as part of
cash and cash equivalents.
Unused credit line Disclosed in notes
Treasury warrants Included as part of cash
Escrow deposit Part of other current/noncurrent asset and reported as liability
Postage stamps on hand Reported as office supplies or as a prepaid expense
Unrecorded cash disbursements Record the disbursements by:
Dr A/P or other appropriate account xxx
Cr Cash xxx
Unrecorded cash collections/receipts Record the collections by:
Dr Cash xxx
Cr A/R or any other appropriate account
xxx

NOTE:
- If an item cannot be included as cash equivalent because it did not qualify the cut-off period
(i.e. three months), it will always be classified as investments (short term or long term) depending on
the period up to maturity.
- The reckoning period for time deposit is its duration since time deposit generally does not
have secondary market. For other securities with secondary market, the reckoning period would be
three months from the acquisition date until maturity date.
If the problem is silent with regard to:
• Treasury note and bonds – assumed non-current investment
• Cash in money market account – cash and cash equivalent
• Time deposit - cash and cash equivalent
PROBLEMS:
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

1. You were able to gather the following from the December 31, 2021 trial balance of RV
Corporation in connection with your audit of the company:
Cash on hand P 700,000
Petty cash fund 11,000
BPI current account 1,500,000
Security Bank current account No. 01 1,050,000
Security Bank current account No. 02 (50,000)
PNB savings account 1,300,000
PNB time deposit 520,000

Cash on hand includes the following items:

a. Customer’s check for P30,000 returned by bank on December 26, 2021 due to insufficient fund but
subsequently redeposited and cleared by the bank on January 8, 2022.
b. Customer’s check for P20,000 dated January 2, 2022, received on December 29, 2021.
c. Postal money orders received from customers, P40,000.

The petty cash fund consisted of the following items as of December 31, 2021. Currency and coins
P 2,000
Employees’ vales 1,800
Currency in an envelope marked “collections for charity”
with names attached 1,200
Unreplenished petty cash vouchers 1,500
Check drawn by RV Corporation, payable
to the petty cashier 4,600
P11,100
Included among the checks drawn by RV Corporation against the BPI current account and
recorded in December 2021 are the following:
a. Check written and dated December 29, 2021 and delivered to payee on January 2, 2022, P50,000.
b. Check written on December 27, 2021, dated January 2, 2022, delivered to payee on December 29,
2021, P40,000.
The credit balance in the Security Bank current account No. 2 represents checks drawn in excess of
the deposit balance. These checks were still outstanding at December 31, 2021.
The savings account deposit in PNB has been set aside by the board of directors for acquisition of
new equipment. This account is expected to be disbursed in the next 3 months from the balance sheet
date.

Determine the following:

a. Cash on hand
b. Petty cash fund
c. Adjusted BPI current account
d. Cash and cash equivalents
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

Solutions:
a. Unadjusted cash on hand P 700,000
NSF check (30,000)
Post dated check received (20,000)
Adjusted cash on hand P 650,000
b. Currency and coins P 2,000
Replenishment check 4,600
Petty cash fund P 6,600
c. Unadjusted BPI current account P 1,500,000
Unreleased check 50,000
Post dated check delivered 40,000
Adjusted BPI current account P 1,590,000

d. Cash on hand P 650,000

Petty cash fund 6,600
BPI current account 1,590,000
Security Bank current account (net) 1,000,000
PNB time deposit 520,000
Cash and cash equivalents P 3,766,600

3. The books of KARA, Inc. disclosed a cash balance of P687,570 on December 31, 2021. The bank
statement as of December 31 showed a balance of P597,500. Additional information that might be
useful in reconciling the two balances follows:
a. Check number 748 for P30,000 was originally recorded on the books as P45,000. b. A customer's
note dated September 25 was discounted on October 12. The note was dishonored on December 29
(maturity date). The bank charged KARA's account for P142,650, including a protest fee of P2,650.
c. The deposit of December 24 was recorded on the books as P28,950, but it was actually a deposit of
P27,000.
d. Outstanding checks totaled P98,850 as of December 31.
e. There were bank service charges for December of P2,100 not yet recorded on the books.
f. KARA's account had been charged on December 26 for a customer's NSF check for P12,960.
g. KARA properly deposited P6,000 on December 3 that was not recorded by the bank.
h. Receipts of December 31 for P134,250 were recorded by the bank on January 2.
i. A bank memo stated that a customer's note for P45,000 and interest of P1,650 had been collected on
December 27, and the bank charged a P360 collection fee
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

Determine the following:

a. Adjusted cash balance
b. Net adjustment to cash at year-end
Solutions:
a. Balance per bank statement, 12/31/21 P 597,500
Add: Deposits in transit P 134,250
Bank error-deposit not recorded 6,000 140,250
Total 737,750
Less: Outstanding checks 98,850
Adjusted bank balance, 12/31/21 P 638,900

Balance per books, 12/31/21 P 737,270

Add: Book error - Check No. 748 P15,000
Customer note collected by bank 46,290 61,290
Total 798,560
Less: Dishonored note 142,650
Book error-improperly recorded deposit 1,950
NSF check 12,960 Bank service charges 2,100 159,660
Adjusted book balance, 12/31/21 P638,900

b. Unadjusted balance per books, 12/31/21 P 737,270

Adjusted book balance, 12/31/21 638,900
Net adjustment to cash – credit P 98,370
4. Shown below is the bank reconciliation for Happiness Company for November 2021:
Balance per bank, Nov. 30, 2021 P 250,000
Add: Deposits in transit 24,000
Total 274,000
Less: Outstanding checks P 28,000
Bank credit recorded in error 20,000 48,000
Cash balance per books, Nov. 30, 2021 P 226,000

The bank statement for December 2021 contains the following data:
Total deposits P 120,000
Total charges, including an NSF check of P10,000 and
a service charge of P800 98,000

All outstanding checks on November 30, 2021, including the bank credit, were cleared in the bank in
December 2021.
There were outstanding checks of P40,000 and deposits in transit of P28,000 on December 31, 2021.
Determine the following:
a. Cash balance per bank at year-end
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

b. December receipts per books

c. December disbursements per books
d. Cash balance per book at year-end

Solutions:
a. Balance per bank, Nov. 30, 2021 P 250,000
Add: Total deposits per bank statement 120,000
Total 370,000
Less: Total charges per bank statement 98,000
Balance per bank, Dec. 31, 2021 P 272,000

b. Total deposits per bank statement P 120,000

Less: deposits in transit, Nov. 30 24,000
Dec. receipts cleared through the bank 96,000
Add: deposits in transit, Dec. 31 28,000
December receipts per books P 124,000

c. Total charges per bank statement P 98,000

Less: Outstanding checks, Nov. 30 P 28,000
Correction of erroneous bank credit 20,000
December NSF check 10,000
December bank service charge 800 58,800
Dec. disbursements cleared through the bank 39,200
Add: outstanding checks, Dec. 31 40,000
December disbursements per books P 79,200

d. Balance per books, Nov. 30, 2021 P 226,000

Add: December receipts per books 124,000
Total 350,000
Less: December disbursements per books 79,200
Balance per books, Dec. 31, 2021 P 270,800

5. The accountant for the Red Summer assembled the following data:
June 30 July 31
Cash account balance P 18,822 P 42,574
Bank statement balance 97,082 117,617
Deposits in transit 8,200 12,750
Outstanding checks 28,000 31,000
Bank service charge 80 69
Customer’s check deposited July 10, returned by bank 8,350
on July 16 marked as NSF, and redeposited
immediately; no entry made on books for return or
redeposit
Collection by bank of company’s notes receivable 70,810 81,000
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

The bank statement and the company’s cash records show these totals:
Disbursements in July per bank statement P 220,373
Cash receipts in July per Red Summer’s books 240,452

Determine the following:

a. Adjusted cash balance as of June 30
b. Adjusted bank receipts for July

Solution:

Beginning
June 30 Receipts
Balance per bank statement 97,082 240,908*
Deposits in transit:
June 30 8,200 (8,200)
July 31 12,750
Outstanding checks:
June 30 (28,000)
July 31
NSF check redeposited (8,350)
Adjusted bank balance P 77,282 P 237,108

*117,617 + 220,373 – 97,082

6. You obtained the following information on the current account of Summer Magic Company during
your examination of its financial statements for the year ended December 31, 2021.

The bank statement on November 30, 2021 showed a balance of P356,000. Among the bank credits in
November was customer’s note for P100,000 collected for the account of the company which the
company recognized in December among its receipts. Included in the bank debits were cost of
checkbooks amounting to P1,200 and a P40,000 check which was charged by the bank in error
against Summer Magic Co. account. Also in November you ascertained that there were deposits in
transit amounting to P90,000 and outstanding checks totaling P170,000.

The bank statement for the month of December showed total credits of P516,000 and total charges of
P104,000. The company’s books for December showed total debits of P835,600, total credits of
P407,000 and a balance of P485,000. Bank debit memos for December were: No. 131 for service
charges, P1,600 and No. 132 on a customer’s returned check marked “Refer to Drawer” for P25,000.

On December 31, 2021 the company placed with the bank a customer’s promissory note with a face
value of P120,000 for collection. The company treated this note as part of its receipts although the
bank was able to collect on the note only in January, 2022.
A check for P4,960 was recorded in the company cash payments books in December as P49,600.

Determine the following:

a. Undeposited collections at year-end
b. Outstanding checks at year-end
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

Solutions:
a.
Deposits in transit, 11/30/21 P 90,000
Add: Collections in December
December book receipts P 835,600
Less: receipts not representing collections
in December:
Customer’s note collected by bank in
Nov. recorded in Dec. P 100,000
Uncollected customer's note treated as receipts 120,000 220,000 615,600 Total
705,600

Less: Deposits credited by the bank in December:

December bank receipts P516,000
Less: receipts not representing deposits:
Erroneous bank debit, Nov.; corrected Dec. 40,000 476,000
Deposits in transit, 12/31/21 P 229,600

7. The RBB Corporation was organized on January 15, 2021 and started operation
soon thereafter. The Company cashier who acted also as the bookkeeper had kept
the accounting records very haphazardly. The manager suspects him of defalcation
and engaged you to audit his account to find out the extent of the fraud, if there is
any.
On November 15, when you started the examination of the accounts, you find the
cash on hand to be P25,700. From inquiry at the bank, it was ascertained that the
balance of the Company’s bank deposit in current account on the same date was
P131,640. Verification revealed that the check issued for P9,260 is not yet paid by
the bank. The corporation sells at 40% above cost.
Your examination of the available records disclosed the following information:

Capital stock issued at par for cash P1,800,000

Real state purchased and paid in full 1,000,000
Mortgage liability secured by real state 400,000
Furniture and fixtures (gross) bought on which there
is still balance unpaid of P30,000 165,000
Outstanding notes due to bank 160,000
Total amount owed to creditors on open account 251,480
Total sales 1,815,750
Total amount still due from customers 446,900
Inventory of merchandise on November 15 at cost 480,600
Expenses paid excluding purchases 303,780
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

Determine the following:

a. Collections from sales
b. Payments for purchases
c. Total cash disbursements

Solutions:
a.
Sales P1,815,750
Less: accounts receivable 446,900
Collections from sales P1,368,850
b.
Cost of sales (P1,815,750/140%) P1,296,964
Add: Merchandise inventory 480,600
Purchases 1,777,564
Less: Accounts payable 251,480
Payments for purchases P1,526,084
c.
Purchase of real estate P1,000,000
Payment for furniture and
fixtures (P165,000 - 135,000
P30,000)
Expenses paid 303,780
Payments for purchases 1,526,084
Total cash disbursements P2,964,864

8. You were engaged to audit the accounts of Rookie Corporation for the year ended
December 31, 2021. In your examination, you determined that the cash account
represents both cash on hand and cash in bank. You further noted that the
company’s internal control over cash is very poor.
You started the audit on January 15, 2022. Based on your cash count on this date,
cash on hand amounted to P21,500. Examination of the cash book and other
evidence of transactions disclosed the following:
a. January collections per duplicate receipts, P75,700.
b. Total duplicate deposit slips, all dated January, P45,000. This amount includes
a deposit representing collections on December 31.
c. Cash book balance at December 31, 2021 amounted to P195,000, representing
both cash on hand and cash in bank.
d. Bank statement for December showed a balance of P175,400.
e. Outstanding checks at December 31:

November checks December checks

No. 280 P1,800 No. 331 P2,400
290 6,600 339 1,600
345 20,000
353 3,600
364 10,000
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

f. Undeposited collections at December 31, 2021 amounted to P25,000.

g. An amount of P4,600 representing proceeds of a clean draft on a customer was
credited by bank, but is not yet taken up in the company’s books.
h. Bank service charges for December, P700.
The company cashier presented to you the following reconciliation statement for
December 2021, which he has prepared:

Balance per books, December 31, P195,600

2021
Add outstanding checks:
No. 331 P2,400
339 1,600
345 2,000
353 3,600
364 1,000 10,600
Total 206,200
Bank service charge (700)
Undeposited collections (25,400)
Balance per bank, December 31, P180,100
2021

Determine the following:

a. Adjusted cash balance at year-end
b. Cash shortage at year-end

Solution:
Bank Books
Unadjusted balances P175,400 P195,000
Add (deduct) adjustments:
Outstanding checks: (46,000)
Undeposited collections 25,000
Unrecorded bank collection 4,600
Bank service charge (700)
Balances 154,400 198,900
Shortage (44,500)
Adjusted balances P154,400 P154,400

9. You are making an audit of the Fiend Corporation for the past calendar year. The balance of the
Petty Cash account at December 31, 2021 was P1,500. Your count of the imprest cash count made at
10:30 am on January 3, 2022, in the presence of the petty cash custodian, revealed:

Currency and coins 621.48

Checks:
Date Maker Bank
12/28/21 Irene, vice-president PNB 380.00
12/29/21 Wendy, employee DBP 50.00
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

12/31/21 Seulgi, customer RCBC 173.60

01/02/22 Joy, customer PNB 111.96
01/10/22 Yeri, employee PNB 70.00
(check received Dec. 29)
(These checks were all considered good when deposited after dates shown on the checks.
The first four checks were actually deposited Jan. 3; the last check was deposited Jan. 11;
all five checks proved to be good.)

Vouchers:
Dec. 11 #261 Kevin, shipping clerk – temporary advance for the use of the receiving
department. Your count
of Mr. Kevin’s fund revealed: currency – P38.80;
merchandise freight bills, P51.20. P 90.00
Dec. 28 # 301 Postage 22.00
Dec. 29 # 302 Freight bill on merchandise purchases 47.30
Dec. 31 # 305 Freight bill on office supplies 78.93
Jan. 2 # 500 Freight bill on merchandise purchases 30.36

IOU Dec. 21 Jeff, employee 56.00

Sales Invoices (for cash sales, collections handled by the petty cashier):
Invoice #315 Dec. 30 P 110.00
328 Dec. 31 183.80
334 Jan. 2 121.36
(As a general rule, the petty cashier endeavored to turn over the proceeds of cash sales to
the general cashier on the 10th, 20th and last days of each month. Proceeds on these sales
were recorded and deposited by the general cashier.)

Postage Stamps:
Three one-peso stamps. The petty cashier handled postage stamps. These stamps
represent the unused stamps purchased on Voucher # 301.

Determine the following:

a. Petty cash fund shortage at year-end
b. Adjusted petty cash fund balance at year end.

Solutions:
a.

Currency and coins 621.48

Checks 785.56
Vouchers 268.59
IOU 56.00
TCAF 1,731.63
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

Petty Cash Fund per ledger (1,500.00)

Undeposited sales ( 415.16)
Cash shortage P (183.53)

b.
Petty Cash Fund
Beg. 1,500
183.53
90.00
238.23
56.00
End. P 932.24

10. The following data are gathered from the cash books and bank statement received from Money
Bank by Lalisa Company:

• The cash in bank ledger account shows a debit balance of P309,188.50as of May 31.
• The bank statement shows a credit balance of P320,580 as of May 31.
• An examination of the checks encashed by the bank shows that the following checks are not
presented for payment:
No. 187, P3,608 No. 189, P15,500
No. 191, P4,400 No. 192, P1,600.50
No. 193, P23,000
• A certified check for P22,750 payable to creditor, was encashed by the bank during May.
• The bank statement shows a deduction of P10,502 for check No. 184. The check was actually made
out at P10,205.
• A check deposited on May 27 for P34,300 was returned by the bank on May 28 marked Refer to
Maker.
• A non-interest bearing note for P45,000 was collected by the bank for the account Lalisa Company.
Collection fee deducted by the bank is P350.
• A deposit for P20,500 was recorded in the books twice.
• Check No. 179 for P26,500 was erroneously recorded in the books as P56,200.
• Interest on an outstanding loan payable, deducted by the bank on May 31, P1,320.
Collections on May 31 to be deposited on June 1, P16,488.

Determine the following:

a. Adjusted cash balance at May 31
b. Cash shortage at May 31

Solutions:
a.
Unadjusted Book balance 309,188.50 Unadjusted Bank balance 320,580
Returned check (34,300.00) Outstanding checks (48,108.50)
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

Collection of Notes 16,488.00 Error 297.00

Error (20,500.00) Deposit in transit 26,488.00
Error 29,700.00
Error ( 1,320.00)
Adjusted book balance 299,256.50 Adjusted bank balance 299,256.50

b.
Cash
34,300
16,488
20,500
29,700
1,320
46,188 56,120
Cash shortage 9,932
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

RECEIVABLES
SUMMARY
AUDIT OBJECTIVES:
- To determine that receivables exist and represent bona fide obligations owed to the company
as of the statement of financial position date.
- To determine that all transactions relative to receivables have been recorded in the proper
accounting period.
- To determine that receivables are recorded and presented at proper amounts in accordance
with PAS/PFRS
- To determine that receivables are properly presented and classified in the statement of
financial position.
AUDIT PROCEDURES:
- Obtain a schedule of aged trade accounts receivable and notes receivable schedule and
reconcile to ledgers.
- Confirm receivables with debtors.
- Inspect notes on hand.
- Perform analytical procedures to determine whether recorded sales and receivables balances
appear reasonable.
- Test cutoff sales and sales returns to determine whether receivables are recorded in proper
accounting period,
- Review collectability of receivables and determine the adequacy of allowance for doubtful
accounts.
- Recalculate the interest income from the notes receivable.
- Evaluate financial statement presentation and disclosure of receivables.
- Obtain written client representations regarding pledge, discount, or assignment of receivable,
and about receivables from officers, directors, affiliates, or other related parties.
MEASUREMENT
- Receivables measured at fair value with changes in fair value reported in earnings
- Receivables measured at lower of cost or fair value
- Except for credit card receivables, trade accounts receivable that have both of the following
characteristics:
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

a. They have a contractual maturity of one year or less

b. They arose from the sale of goods or services.
PROBLEMS:
1. Your audit disclosed that on December 31, 2021, the accounts receivable control account of Miju
Company had a balance of P3,150,000. An analysis of the accounts receivable account showed the
following:
Accounts known to be worthless P 40,000
Advance payments to creditors on purchase orders 200,000
Advances to affiliated companies 400,000
Customers’ accounts reporting credit balances
arising from sales return (250,000)
Interest receivable on bonds 250,000
Other trade accounts receivable – unassigned 800,000
Subscriptions receivable for common stock due in 30 days 700,000
Trade accounts receivable - assigned (Finance
company’s equity in assigned accounts is P150,000) 475,000
Trade installment receivable due 1 – 18 months,
including unearned finance charges of P30,000 430,000
Trade receivables from officers due currently 25,000
Trade accounts on which post-dated checks are held
(no entries were made on receipts of checks) 80,000
P 3,150,000
Determine the adjusted balance of the following:
a. trade accounts receivable as of December 31, 2021
b. current trade and other receivable as of December 31, 2021

Solutions:
a. Other trade accounts receivable – unassigned P 800,000
Trade accounts receivable - assigned 475,000
Trade installment receivable due 1 – 18 months, net of
unearned finance charges of P30,000 400,000
Trade receivables from officers due currently 25,000
Trade accounts on which post-dated checks are held 80,000
Trade accounts receivable P 1,780,000

b. Trade accounts receivable (answer no. 1) P 1,780,000

Advance payments to creditors on purchase orders 200,000
Interest receivable on bonds 250,000
Subscriptions receivable, due in 30 days 700,000
Current trade and other receivables P2,930,000
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

2. The adjusted trial balance of Flames Company as of December 31, 2020 shows the following:

Debit Credit
Accounts receivable P2,000,000
Allowance for bad debts P60,000

Additional information:
• Cash sales of the company represents 10% of gross sales.
• 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms.
• It is expected that cash discount of P15,000 will be taken on accounts receivable outstanding at
December 31, 2021.
• Sales returns in 2021 amounted to P400,000. All returns were from charge sales.
• During 2021, accounts totaling to P45,000 were written off as uncollectible; bad debt recoveries
during the year amounted to P5,000.
• The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding
accounts receivable at year end. The required percentage at December 31, 2021 is 150% of the rate
used on December 31, 2020

Determine the balances of the following:

a. The accounts receivable as of December 31, 2021
b. The allowance for doubtful accounts as of December 31, 2021

Solution:
a. Expected cash discounts P 15,000
Divide by percentage of cash discount 2%
Portion of AR that will be granted cash discounts 750,000
Divide by percentage of total AR estimated to take
advantage of the discount 10%
Accounts receivable, end P 7,500,000

b. Accounts receivable, end P 7,500,000

Multiply by bad debt rate (P60,000/P2,000,000) x 150% 6%
Allowance for doubtful accounts, end P 20,250

3. In your audit of Queendom Co., you noted that the company’s balance sheet shows the accounts
receivable balance at December 31, 2020 as follows:
Accounts receivable P4,600,000
Allowance for doubtful accounts 92,000
P4,692,000

During 2021, transactions relating to the accounts were as follows:

• Sales on account, P40,400,000.
• Cash received from collection of current receivable totaled P21,360,000, after discount of P840,000
were allowed for prompt payment.
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

• Customers’ accounts of P260,000 were ascertained to be worthless and were written off.
• Bad accounts previously written off prior to 2020 amounting to P30,000 were recovered.
• The company decided to provide P194,000 for doubtful accounts by journal entry at the end of the
year.
• Accounts receivable of P6,000,000 have been pledged to a local bank on a loan of P3,400,000.
Collections of P1,500,000 were made on these receivables (not included in the collections previously
given) and applied as partial payment to the loan.

Determine the balances of the following:

a. The accounts receivable as of December 31, 2021
b. The allowance for doubtful accounts as of December 31, 2021
Solutions:
a. Accounts receivable, Dec. 31, 2020 P 4,600,000
Add: Sales on account 40,400,000
Bad debt recoveries 30,000
Total 45,030,000
Less: Current receivables collected, before
cash discounts (P21,360,000 + P840,000) P22,200,000
Accounts written off 260,000
Bad debt recoveries 30,000
Collections made on AR pledged
as collateral 1,500,000 23,990,000
Accounts receivable, Dec. 31, 2021 P 21,040,000

b. Allowance for doubtful accounts, Dec. 31, 2020 P 92,000

Add: Bad debt recoveries 30,000
Provision for doubtful accounts 194,000
Total 316,000
Less: Accounts written off 260,000
Allowance for doubtful accounts, Dec. 31, 2021 P 56,000

4. You were able to obtain the following information from your audit of Lifepoints Corporation’s
Accounts Receivable and Allowance for Doubtful Accounts:
• From the general ledger you noted that the Accounts Receivable has a balance of P958,000 as of
December 31, 2021. Below is a transcript of the Allowance for Doubtful Accounts:
Debit Credit Balance
January 1 – Balance P30,000
July 31 – Write-off P 21,000 9,000
December 31- Provision P 58,000 P 67,000

• The summary of the subsidiary ledger as of December 31, 2021 was totaled as follows:
Debit balances:
Under one month P 380,000
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ACCP302 AC32

One to six months 358,000

Over six months 172,000
P 910,000
Credit balances:
Irene P 9,000 - Good; additional billing in January, 2021
Wendy 16,000 - Should have been credited to Joy
Yeri 15,000 - Advances on sales contract
P40,000

The customers’ ledger is not in agreement with the accounts receivable control. The client
requested you to adjust the control account to the subsidiary ledger after corrections are made.
• It is agreed that 1% is adequate for accounts under one month. Accounts one to six months are
expected to require a reserve of 2%. Accounts over six months are analyzed as follows:
Definitely bad P 46,000
Doubtful (estimated to be 50% collectible) 22,000
Apparently good, but slow (estimated to be 90% collectible) 84,000
Total P 152,000
a. How much is the adjusted balance of Accounts Receivable as of December 31, 2021?
b. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31,
2021?
c. How much the Doubtful Accounts expense for the year 2021?

Solutions:
a.
SL
GL Debit Credit 0-1 month 1-6 months Over 6
months
Unadjusted balance 958,000 910,000 40,000 380,000 350,000 172,000
Add: (Deduct)
Account balances 24,000 (16,000) (40,000) (16,000)
with credit balances
Definitely (46,000) (46,000) (46,000)
uncollectible accounts
Unlocated difference (88,000)
Adjusted balance 848,000 848,000 - 380,000 334,000 126,000

b.
Account classification Adjusted balance Rate Required
Allowance
0 to 1 month P380,000 1% P 3,800
1 to 6 months 334,000 2% 6,680
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ACCP302 AC32

Over 6 months 126,000 P22,000 – 50% 11,000

P84,000 – 10% 8,400
P29,880
c.
Doubtful account expense, per books P 58,000
Add: adjustment to allowance:
Required allowance P 29,880
Less balance before required
allowance (P67,000 – P58,000) 9,000 20,880
Doubtful Accounts expense for 2021 P 37,120

5. Your audit of Seulzip Corporation for the year ended December 31, 2021 revealed that the
Accounts Receivable account consists of the following:
Trade accounts receivable (current) P 4,440,000
Past due trade accounts 740,000
Uncollectible accounts 148,000
Credit balances in customers’ accounts (60,000)
Notes receivable dishonored 250,000
Consignment shipments – at cost
The consignee sold goods costing P86,000 for P180,000.
A 10% commission was charged by the consignee
and remitted the balance to Seulzip. The cash was received in
January, 2022. 360,000
Total P 5,878,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P90,000. It
is estimated that an allowance should be maintained to equal 5% of trade receivables, net of amount
due from the consignee who is bonded. The company has not provided yet for the 2021 bad debt
expense.
Determine the balances of the following:
a. Trade accounts receivable
b. Allowance for doubtful accounts
c. Doubtful account expense
Solutions:
a. Trade receivables (current) P 4,440,000
Past due trade accounts 740,000
Notes receivable dishonored 250,000
Consignment goods already sold (P180,000 x 90%) 162,000
Adjusted trade receivables P 5,592,000
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ACCP302 AC32

b. Adjusted trade receivables P 5,592,000

Less: due from consignee 162,000
Basis of allowance for doubtful accounts 5.430,000
Multiply: Bad debt rate 5%
Required allowance for doubtful accounts P 271,500

c. Required allowance for doubtful accounts P271,500

Add: write-off of uncollectible accounts 148,000
Total 419,500
Less: allowance account before adjustment 90,000
Doubtful accounts expense P 329,500

6. In connection with your examination of the financial statements of Aseul, Inc. for the year ended
December 31, 2021, you were able to obtain certain information during your audit of the accounts
receivable and related accounts.
The December 31, 2021 balance in the Accounts Receivable control accounts is P888,000.
The only entries in the Doubtful Accounts Expense account were:
• A credit for P1,296 on December 2, 2021 because Company S remitted in full for the
accounts charged off on October 31, 2021
• A debit on December 31 for the amount of the credit to the Allowance for Doubtful
Accounts.
The Allowance for Doubtful Accounts schedule is follows:
Debit Credit Balance
January 1, 2021 P15,632
October 31, 2021
Uncollectible accounts:
Company S – P 1,296
Company J – P 3,280
Company Y – P 2,256P5,032 10,600
December 31, 2021 P38,400 P48,000
An aging schedule of the accounts receivable as of December 31, 2021 is presented below:
Age Net debit Amount to which the Allowance
balance is to be adjusted after
adjustments and corrections
have been made
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ACCP302 AC32

0 to 1 month P 382,960 1 percent

1 to 3 months 327,280 2 percent
3 to 6 months 78,720 3 percent
Over 6 months 14,000 Definitely uncollectible, P4,000;
P8,000 is considered 50%
uncollectible; the remainder is

estimated to be 80% collectible.

There is a credit balance in one account receivable (0 to 1 month) of P8,000; it represents an advance
on a sales contract. Also, there is a credit balance in one of the 1 to 3 months account receivable of
P1,000 for which merchandise will be accepted by the customer.
The ledger accounts have not been closed as of December 31, 2021. The Accounts Receivable control
account is not in agreement with the subsidiary ledger. The difference cannot be located, and you
decided to adjust the control account to the sum of the subsidiaries after corrections are made.
Determine the adjusted balance of the following:
a. Accounts receivable
b. Allowance for doubtful accounts
Solutions:
a.
GL SL 0-1 month 1-3 3-6 Over 6
months months
Unadjusted balance 888,000 802,960 382,960 327,280 78,720 14,000
Add: (Deduct)
Understatement of (800)
accounts written off
(P5,832-P5,032)
Definitely (4,000) (4,000) (4,000)
uncollectible accounts
Advances from 8,000 8,000 8,000
customers
Accounts w/ credit 1,000 1,000 1,000
balances
Unlocated difference (69,040)
Adjusted balance 815,960 815,960 390,960 328,280 78,720 10,000

b.
Account classification Adjusted balance Rate Required
Allowance
0 to 1 month P 390,960 1% P 3,909.60
1 to 3 months 328,280 2% 6,565,60
3-6 months 78,720 3% 2,361.60
Over 6 months 10,000 P8,000– 50% 4,000
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ACCP302 AC32

P2,000 – 20% 400

P17,236.80

7. During your examination of the 2021 financial statements of the Coldplay Company you find that
the company does not provide allowance for doubtful accounts ever since it started operations in
2017. The company’s practice is to directly write-off as expense doubtful accounts and credit
recoveries to income. The company’s contracts are generally for two years.
Upon your recommendation, the company agreed to change its accounts for 2021 to give effect to
doubtful treatment on the allowance basis. The allowance is to be based on a percentage of sales
which is derived from the experience of prior years. Statistics for 2017 to 2021 are shown as follows:
Year of Sale 2017 2018 2019 2020 2021
Charge Sales P 3,000,000 P 6,200,000 P 6,900,000 P 7,500,000 P 6,500,000
Accounts
Written off
& Year of Sale
2017 14,000
2018 35,000 22,000
2019 12,000 98,000 31,200
2020 28,800 110,000 46,000
2021 64,800 110,000 33,600
Recoveries &
Year of Sale
2017
2018 2,500
2019 9,500
2020 12,000
2021 13,400

Accounts receivable at December 31, 2021 were as follows:

From 2020 sales P 360,000
From 2021 sales 3,240,000
Total P3,600,000

Determine the following:

a. The average percentage of net doubtful accounts to charge sales that should be used in setting up
the 2021 allowance
b. Doubtful accounts expense for 2021

Solutions:
a.
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ACCP302 AC32

Year Charge sales AR written-off Recoveries Net AR written-off

2017 P 3,000,000 61,000 2,500 58,500
2018 6,200,000 148,800 9,500 139,300
2019 6,900,000 206,000 12,000 194,000
P 16,100,000 P 415,800 P24,000 P 391,800
Net AR written off P 391,800
Divide by charge sales P16,100,000
Percentage 2.43%
b.
Doubtful accounts expense for 2021 (P6,500,000 x P2.43%) P 157,950
8. The accounts receivable of EIP Company were stated at P1,476,250 in a balance sheet submitted to
a banker for credit. You are called upon to audit the report and upon analysis, the asset was found to
consist of the following items:
Due from customers on open account 1,130,000
Acknowledged claim for damages 23,000
Due from consignee at billed price – cost price
being P23,000 30,000
Investment in and advances to affiliated company 165,000
Loans to officers and employees 12,000
Deposits with municipalities – bids for contracts 63,250
Unpaid capital stock subscriptions 55,000
Advances to creditors for merchandise purchased
but not received 22,000
Cash advanced to salesmen for traveling expenses 4,000
Allowance for doubtful expense (28,000)
P 1,476,250
The amount of P1,130,000 due from customers was the remaining balance after deducting accounts
with credit balances of P 7,000.
During your examination, you noted that on December 31, the company assigned P350,000 of
customers’ accounts to secure a 17% P230,000 note payable. A 1% commission based on the
accounts was charged and deducted from the cash received. The client recorded this transaction by a
debit to cash and a credit to notes payable.
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

Determine the balances of the following:

a. Accounts receivable (gross) balance at December 31
b. Total current non-trade receivable balance at December 31

Solutions:
a. The claims for damages is considered as accounts receivable. Therefore, P23,000 is the gross
balance of accounts receivable
b. The amount due from consignee is qualified to be non-trade receivable and therefore has a balance
of P30,000 recorded at billed price.

9. The following selected transactions occurred during the year ended December 31, 2021 of
SMTown Company:

Gross sales (cash and credit) P 950,436.80

Collections from credit customers, net of 2% cash discount 284,000.00
Cash sales 190,000.00
Uncollectible accounts written off 20,200.00
Credit memos issued to credit customers for sales ret./allow. 11,080.00
Cash refunds given to cash customers for sales ret./allow. 15,148.00
Recoveries on accounts receivable written-off in prior years
(not included in cash received stated above) 6,555.20

At year-end, the company provides for estimated bad debts losses by crediting the
Allowance for Bad Debts account for 2% of its net credit sales for the year. The allowance
for bad debts at the beginning of the year is P19,400.20.

Determine the balances of the following:

a. Bad debts expense at year-end
b. Accounts receivable at year-end
c. Allowance for doubtful accounts at year-end

Solutions:
a. Bad debts:
Net credit sales 743,356.80
x % of uncollectible 2%
Bad debts 14,867.14
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

b.
Accounts Receivable
Credit sales 760,436.80 Collection 284,000
Recoveries 6,555.20 Sales discount from 6,000
credit customers
Write off 20,200
Sales returns from 11,080
credit customers
Recoveries 6,555.20
766,992 327,835.20
Ending balance 439,156.80

c. Allowance for bad debts

Beg. Balance 19,400.20
Provision for bad debts 14,867.14
Recoveries 6,555.20
Less: Write-off 20,200
Allowance for doubtful accounts, end. 20,622.54

10. Presented below are unaudited balances of selected accounts of TS Company as of December
31, 2021:

Selected Accounts Unaudited Balances 12/31/21

Debit Credit
Cash 550,000
Accounts receivable 1,500,000
Allowance for doubtful accounts 8,500
Net sales 5,750,000

Additional information are as follows:

a. Goods amounting to P45,000 were invoiced for the accounts of Perfect 10 Store & Co.,
recorded on January 2, 2021 with terms of net, 60 days, FOB shipping point. The goods
were shipped to Variety Store on December 30, 2021.

b. The bank returned on December 29, 2021, a customer’s check for P5,500 marked “DAIF”,
but no entry was made.

c. TS Company estimates that allowance for uncollectible accounts should be one and one-
half percent (1½%) of the accounts receivable balance as of year-end. No provision has
yet been made for 2021.
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

Determine the adjusted balances of the following:

a. Accounts receivable at year-end
b. Allowance for doubtful accounts at year-end

Solutions:
a. Accounts receivable, beg 1,500,000
Goods invoiced 45,000
DAIF check 5,500
Accounts receivable, end. 1,550,500
b. Accounts receivable, end 1,550,500
Multiply: 1½%
Allowance for doubtful accounts 23,250

INVENTORIES
SUMMARY
AUDIT OBJECTIVES:
- To determine whether inventories exists at year-end and represent items held for sale in the
ordinary course of business
- To determine whether all transactions related to inventory are recorded in the proper
accounting period.
- To determine that inventory listings are accurately compiled and inventory quantities include
all items on hand and in transit.
- To determine whether the company has legal title or ownership rights to inventory items and
inventories exclude items billed to customers or owned by others.
- To determine whether the inventories are properly stated with respect to:
a. cost determined by an acceptable method consistently applied.
b. slow-moving, excess, defective, and obsolete items identified and reduced to
replacement cost or net realizable value if lower than cost.
- To determine that the inventories and cost of goods sold are presented and classified in the
financial statements in accordance with PAS/PFRS.
AUDIT PROCEDURES:
- Obtain listings of inventory and reconcile to ledgers.
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

- Observe the taking of physical inventory and conduct test counts.

- Confirm inventories in public warehouse and with consignees.
- Obtain a final inventory listing from the client
a. trace test counts made during the inventory observation into inventory listing.
b. test the clerical accuracy of the final inventory listing.
- Review the year-end cutoff of purchases and sales transactions
- Test numerical sequence of inventory purchase requisition.
- Review entries to cost of goods sold.
- Perform analytical review related to inventories and cost of goods sold.
- Make inquiries of management regarding inventory ownership and examine consignment of
agreements.
- Evaluate the bases and methods of inventory pricing.
- Vouch and test inventory pricing.
- Check inventory for quality and/or obsolescence.
- Determine the existence of pledged inventory.
- Evaluate financial statement presentation of inventories and cost of goods sold, including the
adequacy of disclosure.
PAS 2 INVENTORY
Inventories include assets held for sale in the ordinary course of business (finished goods),
assets in the production process for sale in the ordinary course of business (work in process), and
materials and supplies that are consumed in production (raw materials) (PAS 2.6)
However, PAS 2 excludes certain inventories from its scope
• Work in process arising under construction contracts (PAS 11)
• Financial instruments (PAS 39)
• Biological assets related to agricultural activity and agricultural
produce at the point of harvest (PAS 41).

Inventories are required to be stated at the lower of cost and net realizable value (NRV) (PAS
2.9)

MEASUREMENT OF INVENTORIES
COST SHOULD INCLUDE: (PAS 2.10)
• costs of purchase (including taxes, transport, and handling) net of trade discounts
received
• costs of conversion (including fixed and variable manufacturing overheads)
• other costs incurred in bringing the inventories to their present location and condition
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

PAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs
(interest) can be included in cost of inventories that meet the definition of a qualifying asset. [PAS
2.17 and PAS 23.4]
Inventory cost should not include:
• abnormal waste
• storage costs
• administrative overheads unrelated to production
• selling costs
• foreign exchange differences arising directly on the recent acquisition of inventories
invoiced in a foreign currency
• interest cost when inventories are purchased with deferred settlement terms.

PROBLEMS:
1. The Peek-A-Boo Company is on a calendar year basis. The following data were
found during your audit:
a. Goods in transit shipped FOB destination by a supplier, in the amount of
P100,000, had been excluded from the inventory, and further testing revealed
that the purchase had been recorded.
b. Goods costing P50,000 had been received, included in inventory, and recorded as
a purchase. However, upon your inspection the goods were found to be defective
and would be immediately returned.
c. Materials costing P250,000 and billed on December 30 at a selling price of
P320,000, had been segregated in the warehouse for shipment to a customer. The
materials had been excluded from inventory as a signed purchase order had been
received from the customer. Terms, FOB destination.
d. Goods costing P70,000 was out on consignment with Rookie Company. Since
the monthly statement from Rookie Company listed those materials as on hand,
the items had been excluded from the final inventory and invoiced on
December 31 at P80,000.
e. The sale of P150,000 worth of materials and costing P120,000 had been shipped
FOB point of shipment on December 31. However, this inventory was found to
be included in the final inventory. The sale was properly recorded in 2005.
f. Goods costing P100,000 and selling for P140,000 had been segregated, but not
shipped at December 31, and were not included in the inventory. A review of
the customer’s purchase order set forth terms as FOB destination. The sale had
not been recorded.
g. Your client has an invoice from a supplier, terms FOB shipping point but the
goods had not arrived as yet. However, these materials costing P170,000 had
been included in the inventory count, but no entry had been made for their
purchase.
h. Merchandise costing P200,000 had been recorded as a purchase but not included
as inventory. Terms of sale are FOB shipping point according to the supplier’s
invoice which had arrived at December 31.
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

Further inspection of the client’s records revealed the following December 31, 2021
balances:
Inventory P 1,100,000
Accounts receivable P 580,000
Accounts payable P 690,000
Net sale P 5,050,000
Net purchases P 2,300,000
Net income P 510,000

Determine the following:

Tabunggao, Shane Josa Marie M.
ACCP302 AC32
Tabunggao, Shane Josa Marie M.
ACCP302 AC32

INVESTMENTS
SUMMARY
AUDIT OBJECTIVES:
- To determine that investments in securities (shares, bonds, notes) physically exist and in
loans and advances exist.
- To determine that investments are all included in the statement of financial position.
- To determine that the company owns or has ownership rights to all investments
included in the statement of financial position.
- To determine that investments are valued properly in accordance with generally
accepted accounting principles.
- Investments are properly described and classified in the statement of financial position
and related disclosures are adequate.

AUDIT PROCEDURES:
- Obtain or prepare a listing of securities and investments owned by the company and
related revenue accounts and reconcile to the general ledger.
- Inspect securities on hand.
- Obtain confirmation of securities held by others.
- Vouch selected purchases and sales transactions of securities during the year,
- Verify the client’s cutoff of securities transactions.
- Perform analytical procedures.
- Compute independently revenue from securities.
- Determine market value of securities at statement of financial position date.
- Evaluate the method of accounting for securities.
- Evaluate financial statements presentation and related revenue or loss accounts.