Assertions (OROCA CAVE)
1. Occurence
2. Rights
3. Obligation
4. Completeness
5. Accuracy
6. Cut-Off
7. Allocation
8. Valuation
9. Existence
*physical count, test count, test cut-off procedures, trace test counts, analytical procedures
Inventory Classifications:
1. Held for sale in the ordinary course of business; (Finished Goods Inventory)
2. In the process of production for such sale; (Work-in-Process (WIP) Inventory)
3. In the form of materials or supplies to be consumed in the production process or in the rendering of services. (Raw Materials, Office Supplies, etc.)
Initial Valuation:
*at Cost
Subsequent Valuation:
*lower of Cost or Net Realizable Value
Net Realizable Value:
1. NRV of Finished Goods/Merchandise Inventory = Est. Selling Price less Est. Cost to Sell
2. NRV of WIP Inventory = Est. Selling Price less Est. Cost to Complete less Est. Cost to Sell
3. NRV of Raw Materials and Supplies = Current Replacement Cost or Current Purchase Price
Freight Terms:
1. FOB destination: "Free on Board until destination"
goods in transit=seller is owner ; freight=should be paid by seller
2. FOB shipping point: "Free on Board until shipping point ONLY"
goods in transit=buyer is owner ; freight=should be paid by buyer
3. Freight collect: freight=was paid by buyer (not necessarily shouldered by the buyer)
4. Freight prepaid: freight=was paid by seller
5. FAS (free alongside): "Free Alongside to the dock ONLY"
freight up to the dock=seller; cost of loading and shipment=buyer
6. CIF (cost, insurance, freight): "Free until loading to the ship ONLY"
freight up to the dock and cost of loading=seller;
CIF and shipment=buyer
7. Ex-ship: "Free until the goods exited the ship"
freight until unloading=seller;
Inventory Systems:
1. Periodic: physical count at year end to determine COS and Inventory, End; inventory balance updated at year-end
2. Perpetual: flow of goods is recorded every transaction; inventory balance always updated
List Price =is not the intended selling price of the seller
(Trade discounts) =are not recorded by the buyer or seller. Its deduction from the list price
will reflect the intended selling price
(Cash discounts) =are recorded by the buyer or seller as sales/purchase discount.
Invoice Price =is the net cost/sale price of the item.
Special Sale/Purchase Agreement
1. Goods on Consignment: inventory of consignor/seller
2. Sale on Approval: inventory of seller unless information identified that manifestation of approval has been made
3. Inventory financing/Park sale/Product financing: inventory of seller
4. Sale with right of return: inventor of seller unless right of return is considered normal in the industry (e.g. retail) or time for right of return has already lapsed
5. Installment sales: inventory of buyer
6. Segregated goods: mere segregation of goods does not exclude the same from the seller's inventory unless identified that sale is covered by a special sale agreement (BILL AND HOLD) as in when goods were already billed and awaiting the pick-up of the customer
Inventory Valuation:
1. Specific Identification Method (SIM) - specific costs are attributed to identified items of inventory.
2. First-in, first-out (FIFO) - assume that items purchased first are sold first, and consequently, items at the end of the period are those most recently purchased or produced.
3. Weighted Average Cost - cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period
Other Notes:
1. Purchase or sale of goods with right of repossession are still the inventory of the one who contains the right to repossess. Although there was a transfer of ownership, the goods can be bought back without restriction even if the present owner does not want to part with the goods.
2. The standard requires that all purchases must be recorded at net (Net Method, net of all discounts). Discounts that were not taken are attributable to the management.
3. Abnormal amounts of wasted materials, labor and other production costs are excluded from the cost of inventories and recorded as expense. Normal wastage are part of cost of sales.
4. Storage costs relating to finished goods are expensed, while those relating to WIP are capitalized.
Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards
Sunday, January 26, 2014
Lesson 3 AP: Audit of Receivables - Problem A
Problem:
The following data were gathered during your audit:
Allowance for doubtful accounts, Jan 1, 20x1 P 300,000
Provision for doubtful accounts during 20x1 (3% of 5M Sales) 150,000
Bad debts written off during 20x1 187,500
Recovery of bad debts written off during 20x1 50,000
Estimated doubtful accounts per aging of accounts, Dec 31, 20x1 350,000
Accounts Receivable, Dec 31, 20x1 1,187,500
As per company policy, the allowance for doubtful accounts must be adjusted to equal the estimated amount required based on aging of accounts receivable.
Questions:
1. What is the correct doubtful accounts expense for the year 20x1?
2. What is the correct net book value of the receivables as of December 31, 20x1?
Solution:
1.
Allowance for doubtful accounts, Jan 1, 20x1 P 300,000 begbal
Bad debts written off during 20x1 (187,500)
Recovery of bad debts written off during 20x1 50,000
Unadjusted allowance for doubtful accounts, Dec 31, 20x1 P 162,500
Estimated doubtful accounts per aging of accounts, Dec 31, 20x1 (350,000) endbal
Doubtful accounts expense to be recognized P(187,500)
*It is easier to use a t-account.
Allowance for doubtful accounts
Begbal | Write-off
Recovery |
Expense |
Endbal
2. Accounts Receivable P 1,187,500
Allowance for doubtful accounts (350,000)
Net Book Value of Accounts Receivable 837,500
The following data were gathered during your audit:
Allowance for doubtful accounts, Jan 1, 20x1 P 300,000
Provision for doubtful accounts during 20x1 (3% of 5M Sales) 150,000
Bad debts written off during 20x1 187,500
Recovery of bad debts written off during 20x1 50,000
Estimated doubtful accounts per aging of accounts, Dec 31, 20x1 350,000
Accounts Receivable, Dec 31, 20x1 1,187,500
As per company policy, the allowance for doubtful accounts must be adjusted to equal the estimated amount required based on aging of accounts receivable.
Questions:
1. What is the correct doubtful accounts expense for the year 20x1?
2. What is the correct net book value of the receivables as of December 31, 20x1?
Solution:
1.
Allowance for doubtful accounts, Jan 1, 20x1 P 300,000 begbal
Bad debts written off during 20x1 (187,500)
Recovery of bad debts written off during 20x1 50,000
Unadjusted allowance for doubtful accounts, Dec 31, 20x1 P 162,500
Estimated doubtful accounts per aging of accounts, Dec 31, 20x1 (350,000) endbal
Doubtful accounts expense to be recognized P(187,500)
*It is easier to use a t-account.
Allowance for doubtful accounts
Begbal | Write-off
Recovery |
Expense |
Endbal
2. Accounts Receivable P 1,187,500
Allowance for doubtful accounts (350,000)
Net Book Value of Accounts Receivable 837,500
Thursday, January 23, 2014
Lesson 3 AP: Audit of Receivables - Notes
Assertions (OROCAVE)
1. Occurence (Confirm, Aging, Inspection, Analytical Procedures)
2. Rights (Confirm, Aging, Inspection, Analytical Procedures)
3. Obligations (Confirm, Aging, Inspection, Analytical Procedures)
4. Completeness (Analytical Procedures, Cut-Off)
5. Allocation (Aging, Collectibility)
6. Valuation (Aging, Collectibility)
7. Existence (Confirm, Aging, Inspection, Analytical Procedures)
Classification of Receivables
1. Trade Receivables - arise from sale of goods or services
2. Non-trade Receivables - residual definition; includes advances/receivables from officers,
advances to affiliates (usually long-term), advances to supplier (current),
subscription receivable collectible within one year (current),
claims receivable (current).
Initial Valuation
*Fair Value (plus directly attributable Transaction Costs)
Subsequent Valuation
*at Amortized Cost
*Accounts Receivable: Amortized Cost=NRV
NRV of Accounts Receivable includes the following deductions:
1. Allowance for freight charge
2. Allowance for sales return
3. Allowance for sales discount (gross or net method)
4. Allowance for doubtful accounts (impairment) (allowance or direct write-off method)
Estimating Doubtful Accounts
1. Aging of Accounts Receivable (gives the ending balance of allowance for doubtful accounts)
2. Percent of Accounts Receivable (gives the ending balance of allowance for doubtful accounts)
3. Percent of Sales (gives the doubtful accounts expense)
Modes of Financing
1. Pledge is a promise attached to a loan. This is part of the general Accounts Receivable and is disclosed.
2. Assignment is a transfer of right to collect. This is part of the specific Accounts Receivable - Assigned account.
a. Notification Basis
b. Non-notification Basis
3. Factoring is the sale of receivables. Therefore, there is transfer of ownership. Receivable is derecognized.
a. Casual Factoring = immediately recognize gain or loss
b. Continuing Agreement = includes factor's holdback (current asset)
* In casual factoring, any commission of the factor will be part of loss on factoring.
4. Discounting is the sale of receivable, including interest. There is transfer of ownership.
a. With Recourse
*Conditional Sale = Notes receivable discounted is deducted from total notes receivable.
Note is not derecognized.
*Secured Borrowing = Note is derecognized.
Liability for note receivable discounted is recognized.
b. Without Recourse = Note is derecognized.
*Discount = Maturity Value x Discount Rate x Remaining Term of the Note
*Net Proceeds = Maturity Value - Discount
Impairment
*is the difference between the carrying amount of the loan and the present value of estimated future cash flows discounted at the original effective rate of the loan.
Other Notes:
1. Customer credit balances are current liabilities. The customer paid in excess of his account so it is rightful for the company to return it to the customer.
2. Origination fees received from borrower are recognized as unearned interest income.
3. Direct origination costs are recognized as deferred expense attached to the loan receivable.
4. Amortized Cost of Loan Receivable=Principal - Discount + Premium - Impairement
5. Dishonored notes are removed from notes receivable and transferred to accounts receivable.
Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards
1. Occurence (Confirm, Aging, Inspection, Analytical Procedures)
2. Rights (Confirm, Aging, Inspection, Analytical Procedures)
3. Obligations (Confirm, Aging, Inspection, Analytical Procedures)
4. Completeness (Analytical Procedures, Cut-Off)
5. Allocation (Aging, Collectibility)
6. Valuation (Aging, Collectibility)
7. Existence (Confirm, Aging, Inspection, Analytical Procedures)
Classification of Receivables
1. Trade Receivables - arise from sale of goods or services
2. Non-trade Receivables - residual definition; includes advances/receivables from officers,
advances to affiliates (usually long-term), advances to supplier (current),
subscription receivable collectible within one year (current),
claims receivable (current).
Initial Valuation
*Fair Value (plus directly attributable Transaction Costs)
Subsequent Valuation
*at Amortized Cost
*Accounts Receivable: Amortized Cost=NRV
NRV of Accounts Receivable includes the following deductions:
1. Allowance for freight charge
2. Allowance for sales return
3. Allowance for sales discount (gross or net method)
4. Allowance for doubtful accounts (impairment) (allowance or direct write-off method)
Estimating Doubtful Accounts
1. Aging of Accounts Receivable (gives the ending balance of allowance for doubtful accounts)
2. Percent of Accounts Receivable (gives the ending balance of allowance for doubtful accounts)
3. Percent of Sales (gives the doubtful accounts expense)
Modes of Financing
1. Pledge is a promise attached to a loan. This is part of the general Accounts Receivable and is disclosed.
2. Assignment is a transfer of right to collect. This is part of the specific Accounts Receivable - Assigned account.
a. Notification Basis
b. Non-notification Basis
3. Factoring is the sale of receivables. Therefore, there is transfer of ownership. Receivable is derecognized.
a. Casual Factoring = immediately recognize gain or loss
b. Continuing Agreement = includes factor's holdback (current asset)
4. Discounting is the sale of receivable, including interest. There is transfer of ownership.
a. With Recourse
*Conditional Sale = Notes receivable discounted is deducted from total notes receivable.
Note is not derecognized.
*Secured Borrowing = Note is derecognized.
Liability for note receivable discounted is recognized.
b. Without Recourse = Note is derecognized.
*Discount = Maturity Value x Discount Rate x Remaining Term of the Note
*Net Proceeds = Maturity Value - Discount
Impairment
*is the difference between the carrying amount of the loan and the present value of estimated future cash flows discounted at the original effective rate of the loan.
Other Notes:
1. Customer credit balances are current liabilities. The customer paid in excess of his account so it is rightful for the company to return it to the customer.
2. Origination fees received from borrower are recognized as unearned interest income.
3. Direct origination costs are recognized as deferred expense attached to the loan receivable.
4. Amortized Cost of Loan Receivable=Principal - Discount + Premium - Impairement
5. Dishonored notes are removed from notes receivable and transferred to accounts receivable.
Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards
Wednesday, January 22, 2014
Lesson 2 AP: Audit of Cash - Problem C
Problem:
You obtained the following information in connection with the audit of Bonsoir Company cash account as of December 31, 20x1:
Outstanding checks, 11/30/20x1 P 16,250
Outstanding checks, 12/31/20x1 12,500
Deposit in transit, 11/30/20x1 12,500
Cash balance per general ledger, 12/31/20x1 37,500
Actual company collections from its customers during
December 152,500
Company checks paid by bank in December 130,000
Bank service charges recorded on the company books
in December 2,500
Bank service charges per December bank statement 3,250
Deposits credited by bank during December 145,000
November bank service charges recorded on company
books in December 1,500
The cash receipts book of December is underfooted by P 2,500.
The bank erroneously charged the company's account for a P3,750 check of another depositor. This bank error was corrected in January 20x2.
Questions:
1. How much is the deposit in transit on December 31, 20x1?
2. What is the total unrecorded bank service charges as of December 31, 20x1?
3. What is the total book receipts in December?
4. What is the total amount of company checks issued in December?
5. What is the total book disbursements in December?
6. What is the book balance on November 30, 20x1?
7. What is the bank balance on November 30, 20x1?
8. What is the total bank receipts in December?
9. What is the total bank disbursements in December?
10. What is the bank balance on December 31, 20x1?
Solution:
Bonsoir Company
Proof of Cash
For the month ended December 31, 20x1
November 30 Receipts Disbursements December 31
Book Balances 16,250 + 150,000 - 128,750 = 37,500
Bank Service Charge
November 30 DM (1,500) (1,500)
December 31 DM 2,250 (2,250)
Underfoot of CRJ 2,500 2,500
Adjusted Book Balances 14,750 152,500 129,500 37,750
Bank Balances 18,500 145,000 137,000 26,500
Outstanding Checks
November 30 (16,250) (16,250)
December 31 12,500 (12,500)
Deposit in Transit
November 30 12,500 (12,500)
December 31 20,000 20,000
Bank Error (3,750) 3,750
Adjusted Bank Balances 14,750 152,500 129,500 37,750
*The items in Black were already given.
*The items in Green were computed from the given.
*The items in Red were squeezed from the proof of cash table.
*Magkatabi, different signs; magkalayo, same signs..except for the balances =)
*DM=Debit Memo; CRJ=Cash Receipts Journal
*Receipts and Disbursements relates to December transactions.
*A line item always affects two columns in the Proof of Cash.
Let's start with first line item in the problem.
1. Outstanding checks, 11/30/20x1, 16,250
These are considered as disbursements for the month of November that's why you subtract 16,250 from the November 30 Bank Balance. Subsequently, you also subtract 16,250 from the bank disbursements of December because the checks are presumed to be encashed in the bank during December unless otherwise specified.
2. Outstanding checks, 12/31/20x1, 12,500
These are considered as disbursements for the month of December so add 12,500 in the Disbursements and deduct 12,500 in the December 31 Bank Balance. These checks are not yet presented for encashment by the payee that's why it is not reflected as a disbursement in the bank statement but reflected as a disbursement in the book balance.
3. Deposit in transit, 11/30/20x1, 12,500
The deposit in transit is added to the November 30 Bank Balance since they are rightfully receipts from November but are not yet received by the bank. Subsequently, it is subtracted from the receipts of December because the bank only received your November Receipts in December.
4. Cash balance per general ledger 12/31/20x1, 37,500
This represents the unadjusted book balance for December 31.
5. Actual company collections from its customers during December, 152,500
This represents part of the receipts (in the books) during December. Other possible receipts are notes collected by the bank (CM). However, no other items in the problem affect the cash receipts in the books. Therefore, it is safe to presume that 152,500 is the amount of December Book Receipts. We can't presume that this is the amount of the unadjusted December Book Receipts because of the existence of a book error affecting receipts.
6. Company checks paid by bank in December, 130,000
This represents part of the bank disbursements during December. However, paid checks are not the only disbursements reflected in the bank statement. Other disbursements reflected in the bank statement are the bank service charge and bank errors. Other disbursements not reflected in the bank statement are outstanding checks.
The following solution reflects the computation for the unadjusted bank disbursements:
Company checks paid by bank in December 130,000
Bank service charges per December bank statement 3,250
Bank error (erroneously charged check) 3,750 (will later be adjusted)
Unadjusted Bank Disbursements 137,000
7. Bank service charges recorded on the company books in December, 2,500
Bank service charges per December bank statement, 3,250
November bank service charges recorded on company books in December, 1,500
These items reflect that the bank service charges recorded on the company books in December includes the November bank service charge plus an estimate of the December bank service charge.
The following solution reflects the existence of unrecorded bank service charges.
Bank service charges recorded on the company books in December 2,500
November bank service charges recorded on company books in December (1,500)
Bank service charges per December bank statement (3,250)
Unrecorded bank service charge (2,250)
8. Deposits credited by bank during December, 145,000
This represents the unadjusted Bank Receipts.
9. The cash receipts book of December is underfooted by 2,500
This represents a book error in December. The unadjusted book balances are referenced from the totals of the cash books. Since the underfooting unjustly reduces the total of the cash books, it must be corrected. Therefore, we add the deficiency of 2,500 to the cash book receipts and December 31 book balance.
10. The bank erroneously charged the company's account for a 3,750 check of another depositor. This bank error was corrected in January 20x2.
Since the bank error was corrected the following month, we must correct our December bank balances to reconcile with our book balances. Hence, we subtract the bank disbursements and add it back to the December 31 bank balance.
By filling up the black and green items in the proof of cash, you can now solve for the answers.
Answers:
1. 20,000
2. 2,250
3. 150,000
4. 126,250
5. 128,750
6. 16,250
7. 18,500
8. 145,000
9. 137,000
10. 26,500
You obtained the following information in connection with the audit of Bonsoir Company cash account as of December 31, 20x1:
Outstanding checks, 11/30/20x1 P 16,250
Outstanding checks, 12/31/20x1 12,500
Deposit in transit, 11/30/20x1 12,500
Cash balance per general ledger, 12/31/20x1 37,500
Actual company collections from its customers during
December 152,500
Company checks paid by bank in December 130,000
Bank service charges recorded on the company books
in December 2,500
Bank service charges per December bank statement 3,250
Deposits credited by bank during December 145,000
November bank service charges recorded on company
books in December 1,500
The cash receipts book of December is underfooted by P 2,500.
The bank erroneously charged the company's account for a P3,750 check of another depositor. This bank error was corrected in January 20x2.
Questions:
1. How much is the deposit in transit on December 31, 20x1?
2. What is the total unrecorded bank service charges as of December 31, 20x1?
3. What is the total book receipts in December?
4. What is the total amount of company checks issued in December?
5. What is the total book disbursements in December?
6. What is the book balance on November 30, 20x1?
7. What is the bank balance on November 30, 20x1?
8. What is the total bank receipts in December?
9. What is the total bank disbursements in December?
10. What is the bank balance on December 31, 20x1?
Solution:
Bonsoir Company
Proof of Cash
For the month ended December 31, 20x1
November 30 Receipts Disbursements December 31
Book Balances 16,250 + 150,000 - 128,750 = 37,500
Bank Service Charge
November 30 DM (1,500) (1,500)
December 31 DM 2,250 (2,250)
Underfoot of CRJ 2,500 2,500
Adjusted Book Balances 14,750 152,500 129,500 37,750
Bank Balances 18,500 145,000 137,000 26,500
Outstanding Checks
November 30 (16,250) (16,250)
December 31 12,500 (12,500)
Deposit in Transit
November 30 12,500 (12,500)
December 31 20,000 20,000
Bank Error (3,750) 3,750
Adjusted Bank Balances 14,750 152,500 129,500 37,750
*The items in Black were already given.
*The items in Green were computed from the given.
*The items in Red were squeezed from the proof of cash table.
*Magkatabi, different signs; magkalayo, same signs..except for the balances =)
*DM=Debit Memo; CRJ=Cash Receipts Journal
*Receipts and Disbursements relates to December transactions.
*A line item always affects two columns in the Proof of Cash.
Let's start with first line item in the problem.
1. Outstanding checks, 11/30/20x1, 16,250
These are considered as disbursements for the month of November that's why you subtract 16,250 from the November 30 Bank Balance. Subsequently, you also subtract 16,250 from the bank disbursements of December because the checks are presumed to be encashed in the bank during December unless otherwise specified.
2. Outstanding checks, 12/31/20x1, 12,500
These are considered as disbursements for the month of December so add 12,500 in the Disbursements and deduct 12,500 in the December 31 Bank Balance. These checks are not yet presented for encashment by the payee that's why it is not reflected as a disbursement in the bank statement but reflected as a disbursement in the book balance.
3. Deposit in transit, 11/30/20x1, 12,500
The deposit in transit is added to the November 30 Bank Balance since they are rightfully receipts from November but are not yet received by the bank. Subsequently, it is subtracted from the receipts of December because the bank only received your November Receipts in December.
4. Cash balance per general ledger 12/31/20x1, 37,500
This represents the unadjusted book balance for December 31.
5. Actual company collections from its customers during December, 152,500
This represents part of the receipts (in the books) during December. Other possible receipts are notes collected by the bank (CM). However, no other items in the problem affect the cash receipts in the books. Therefore, it is safe to presume that 152,500 is the amount of December Book Receipts. We can't presume that this is the amount of the unadjusted December Book Receipts because of the existence of a book error affecting receipts.
6. Company checks paid by bank in December, 130,000
This represents part of the bank disbursements during December. However, paid checks are not the only disbursements reflected in the bank statement. Other disbursements reflected in the bank statement are the bank service charge and bank errors. Other disbursements not reflected in the bank statement are outstanding checks.
The following solution reflects the computation for the unadjusted bank disbursements:
Company checks paid by bank in December 130,000
Bank service charges per December bank statement 3,250
Bank error (erroneously charged check) 3,750 (will later be adjusted)
Unadjusted Bank Disbursements 137,000
7. Bank service charges recorded on the company books in December, 2,500
Bank service charges per December bank statement, 3,250
November bank service charges recorded on company books in December, 1,500
These items reflect that the bank service charges recorded on the company books in December includes the November bank service charge plus an estimate of the December bank service charge.
The following solution reflects the existence of unrecorded bank service charges.
Bank service charges recorded on the company books in December 2,500
November bank service charges recorded on company books in December (1,500)
Bank service charges per December bank statement (3,250)
Unrecorded bank service charge (2,250)
8. Deposits credited by bank during December, 145,000
This represents the unadjusted Bank Receipts.
9. The cash receipts book of December is underfooted by 2,500
This represents a book error in December. The unadjusted book balances are referenced from the totals of the cash books. Since the underfooting unjustly reduces the total of the cash books, it must be corrected. Therefore, we add the deficiency of 2,500 to the cash book receipts and December 31 book balance.
10. The bank erroneously charged the company's account for a 3,750 check of another depositor. This bank error was corrected in January 20x2.
Since the bank error was corrected the following month, we must correct our December bank balances to reconcile with our book balances. Hence, we subtract the bank disbursements and add it back to the December 31 bank balance.
By filling up the black and green items in the proof of cash, you can now solve for the answers.
Answers:
1. 20,000
2. 2,250
3. 150,000
4. 126,250
5. 128,750
6. 16,250
7. 18,500
8. 145,000
9. 137,000
10. 26,500
Lesson 2 AP: Audit of Cash - Problem B
Problem:
Bonjour Company
General and Petty Cash Count
Audit Year: 20x1
Date of Count: January 5, 20x2, 10:00am
Bills and Coins
Denomination Pieces
P 500 218
100 454
50 610
20 1,008
10 20
5 608
1 1,040
0.25 4,032
Checks
Maker Payee Date Amount
Tissot - Customer Bonjour Company 12/30/20x1 P 23,840
Castro - Customer Bonjour Company 12/26/20x1 25,010
Allez - Customer Bonjour Company 1/2/20x2 11,414
Petra - Customer Bonjour Company 12/21/20x1 26,700
Bonjour Company Bonne Chance Corp. 12/27/20x1 29,000
Salut - Officer Bearer 1/5/20x2 620
Bueno* Cash 12/29/20x1 520
*Amount is for a return of travel advance made to the employee in an earlier period.
Vouchers and IOUS
Paid to Date Amount
BWD 1/2/20x2 P 70
BENECO 12/20/20x1 300
Eurotel - Christmas Party 12/23/20x1 12,580
Vina - IOU 12/27/20x1 600
Additional Notes: (mga ebidensya ng cash transactions ukol sa binilang)
1. Cash sales invoice (all currencies, No. 17903 to 18112), P 201,000.
2. Official Receipts
Number Amount Form of Collection
31250 P 1,120 Cash
31251 25,010 Check
31252 2,404 Cash
31253 23,840 Check
31254 26,700 Check
3. Stamps of various denomination amounted to P 160.
4. A notation on an envelope is "Proceeds from employee contribution for Christmas Party, P 19,000".
5. Petty cash per ledger, P 30,000.
Questions:
1. How much is the petty cash shortage as of January 5, 20x2?
2. What is the credit adjustment to correct the petty cash fund?
3. What is the adjusted petty cash fund as of December 31, 20x1?
Solution:
1. Accountability: (ano ang dapat na meron)
Cash receipts, undeposited P 201,000 from sales invoice No. 17903 to 18112
Cash and Check receipts, undeposited 79,074 from OR No. 31250-31254
Check of Allez - Customer, undeposited 11,414 unrecorded check
Check of Salut - Officer, undeposited 620 in payment of an IOU
Check of Bueno - Employee, undeposited 520 to reimburse the entity's unused fund
Petty cash per ledger 30,000 must account the fund's disbursements
Proceeds for Christmas Party 19,000 the amount must be intact
Total Accountability P 341,628
Accounted for:
(yung nabilang na cash, at kung saan napadpad yung cash sa general and petty cash fund)
Bills and Coins P 210,348
Checks 88,724
Vouchers and IOUS 13,550
Amount Accounted for P 312,622
*In counting for checks, we did not include the following:
Bonjour Company Bonne Chance Corp. 12/27/20x1 because it is an undelivered check
Accountability less Accounted for equals P 29,006 Cash Shortage as of January 5, 20x2.
*The Accountability and Accounted for amount are not absolute amounts. You may eliminate items that are surely the same in both accountability and accounted for for shorter solutions.
2. Vouchers and IOUS P 970
Cash Shortage 29,006
Credit to Petty Cash Fund P 29,976
*The voucher paid to Eurotel for the Christmas Party was not included in the vouchers because the related amount disbursed came from the proceeds from employee contribution for the Christmas party and not from the petty cash fund.
*The total amount of the cash shortage is to be credited to the petty cash fund because the petty cash fund custodian is the one primarily responsible for the shortage. The receivable from petty cash custodian will be debited for this entry, and this account will be reversed when paid by such custodian or proven that it was not the fault of the custodian(it will be transferred to a loss or receivable from another employee).
3. Petty Cash Fund, per ledger P 30,000
Credit to Petty Cash Fund 29,976
Adjusted Petty Cash Fund, 12/21/20x1 P 24
Refer to: http://nerdtayo.blogspot.com/2014/01/lesson-2-ap-audit-of-cash-and-cash.html
Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards
Bonjour Company
General and Petty Cash Count
Audit Year: 20x1
Date of Count: January 5, 20x2, 10:00am
Bills and Coins
Denomination Pieces
P 500 218
100 454
50 610
20 1,008
10 20
5 608
1 1,040
0.25 4,032
Checks
Maker Payee Date Amount
Tissot - Customer Bonjour Company 12/30/20x1 P 23,840
Castro - Customer Bonjour Company 12/26/20x1 25,010
Allez - Customer Bonjour Company 1/2/20x2 11,414
Petra - Customer Bonjour Company 12/21/20x1 26,700
Bonjour Company Bonne Chance Corp. 12/27/20x1 29,000
Salut - Officer Bearer 1/5/20x2 620
Bueno* Cash 12/29/20x1 520
*Amount is for a return of travel advance made to the employee in an earlier period.
Vouchers and IOUS
Paid to Date Amount
BWD 1/2/20x2 P 70
BENECO 12/20/20x1 300
Eurotel - Christmas Party 12/23/20x1 12,580
Vina - IOU 12/27/20x1 600
Additional Notes: (mga ebidensya ng cash transactions ukol sa binilang)
1. Cash sales invoice (all currencies, No. 17903 to 18112), P 201,000.
2. Official Receipts
Number Amount Form of Collection
31250 P 1,120 Cash
31251 25,010 Check
31252 2,404 Cash
31253 23,840 Check
31254 26,700 Check
3. Stamps of various denomination amounted to P 160.
4. A notation on an envelope is "Proceeds from employee contribution for Christmas Party, P 19,000".
5. Petty cash per ledger, P 30,000.
Questions:
1. How much is the petty cash shortage as of January 5, 20x2?
2. What is the credit adjustment to correct the petty cash fund?
3. What is the adjusted petty cash fund as of December 31, 20x1?
Solution:
1. Accountability: (ano ang dapat na meron)
Cash receipts, undeposited P 201,000 from sales invoice No. 17903 to 18112
Cash and Check receipts, undeposited 79,074 from OR No. 31250-31254
Check of Allez - Customer, undeposited 11,414 unrecorded check
Check of Salut - Officer, undeposited 620 in payment of an IOU
Check of Bueno - Employee, undeposited 520 to reimburse the entity's unused fund
Petty cash per ledger 30,000 must account the fund's disbursements
Proceeds for Christmas Party 19,000 the amount must be intact
Total Accountability P 341,628
Accounted for:
(yung nabilang na cash, at kung saan napadpad yung cash sa general and petty cash fund)
Bills and Coins P 210,348
Checks 88,724
Vouchers and IOUS 13,550
Amount Accounted for P 312,622
*In counting for checks, we did not include the following:
Bonjour Company Bonne Chance Corp. 12/27/20x1 because it is an undelivered check
Accountability less Accounted for equals P 29,006 Cash Shortage as of January 5, 20x2.
*The Accountability and Accounted for amount are not absolute amounts. You may eliminate items that are surely the same in both accountability and accounted for for shorter solutions.
2. Vouchers and IOUS P 970
Cash Shortage 29,006
Credit to Petty Cash Fund P 29,976
*The voucher paid to Eurotel for the Christmas Party was not included in the vouchers because the related amount disbursed came from the proceeds from employee contribution for the Christmas party and not from the petty cash fund.
*The total amount of the cash shortage is to be credited to the petty cash fund because the petty cash fund custodian is the one primarily responsible for the shortage. The receivable from petty cash custodian will be debited for this entry, and this account will be reversed when paid by such custodian or proven that it was not the fault of the custodian(it will be transferred to a loss or receivable from another employee).
3. Petty Cash Fund, per ledger P 30,000
Credit to Petty Cash Fund 29,976
Adjusted Petty Cash Fund, 12/21/20x1 P 24
Refer to: http://nerdtayo.blogspot.com/2014/01/lesson-2-ap-audit-of-cash-and-cash.html
Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards
Lesson 2 AP: Audit of Cash - Problem A
Problem:
In lieu with your audit of Bonne Chance Company for the year ended December 31, 20x1, you gathered the following information:
Current account at BDO P 1,500,000
Current account at Landbank (75,000)
Payroll account 375,000
Foreign bank account - restricted (in USD) 15,000
Postage stamps 750
Employee's post dated check 3,000
IOU from a key officer 7,500
Credit memo from a vendor for a purchase return 15,000
Traveler's check 37,500
Customer's not-sufficient-funds check 11,250
Money Orders 22,500
Petty cash fund (P3,000 in currency and
expense vouchers for P4,500) 7,500
Treasury bills, due 3/31/20x2 (purchased 12/31/20x1) 150,000
Treasury bills, due 1/31/20x2 (purchased 1/1/20x1) 225,000
Change fund 2,500
Bond sinking fund 250,000
The current exchange rate as of December 31, 20x1 is at P50 for every 1 USD.
What is the total cash and cash equivalent to be reported by the company in its December 31, 20x1 Statement of Financial Position?
Solution:
Current account at BDO P 1,500,000 Cash in Bank
Current account at Landbank (75,000) Current Liability
Payroll account 375,000 Current Fund
Foreign bank account - restricted (in USD) 15,000 Legally Restricted
Postage stamps 750 Office Supplies
Employee's post dated check 3,000 Can't encash it yet
IOU from a key officer 7,500 Receivable from Officers
Credit memo from a vendor for a purchase return 15,000 Purchase Returns
Traveler's check 37,500 Undeposited Check
Customer's not-sufficient-funds check 11,250 Restore Receivable
Money Orders 22,500 Good as Cash
Petty cash fund (P3,000 in currency and Petty Cash on Hand
expense vouchers for P4,500) 7,500 Record as Expenses
Treasury bills, due 3/31/20x2 (purchased 12/31/20x1) 150,000 Acquired 3 months
before maturity
Treasury bills, due 1/31/20x2 (purchased 1/1/20x1) 225,000 Short-term Investments
Change fund 2,500 Current Fund
Bond sinking fund 250,000 Long-term Investments
Adding up the amounts in bold format, we will arrive at P 2,090,500.
Refer to: http://nerdtayo.blogspot.com/2014/01/lesson-2-ap-audit-of-cash-and-cash.html
Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards
In lieu with your audit of Bonne Chance Company for the year ended December 31, 20x1, you gathered the following information:
Current account at BDO P 1,500,000
Current account at Landbank (75,000)
Payroll account 375,000
Foreign bank account - restricted (in USD) 15,000
Postage stamps 750
Employee's post dated check 3,000
IOU from a key officer 7,500
Credit memo from a vendor for a purchase return 15,000
Traveler's check 37,500
Customer's not-sufficient-funds check 11,250
Money Orders 22,500
Petty cash fund (P3,000 in currency and
expense vouchers for P4,500) 7,500
Treasury bills, due 3/31/20x2 (purchased 12/31/20x1) 150,000
Treasury bills, due 1/31/20x2 (purchased 1/1/20x1) 225,000
Change fund 2,500
Bond sinking fund 250,000
The current exchange rate as of December 31, 20x1 is at P50 for every 1 USD.
What is the total cash and cash equivalent to be reported by the company in its December 31, 20x1 Statement of Financial Position?
Solution:
Current account at BDO P 1,500,000 Cash in Bank
Payroll account 375,000 Current Fund
Traveler's check 37,500 Undeposited Check
Money Orders 22,500 Good as Cash
Petty cash fund (P3,000 in currency
Treasury bills, due 3/31/20x2 (purchased 12/31/20x1) 150,000 Acquired 3 months
before maturity
Change fund 2,500 Current Fund
Adding up the amounts in bold format, we will arrive at P 2,090,500.
Refer to: http://nerdtayo.blogspot.com/2014/01/lesson-2-ap-audit-of-cash-and-cash.html
Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards
Lesson 2 AP: Audit of Cash and Cash Equivalents - Notes
Assertions (COVER)
1. Completeness (Cut-off, Proof of Cash)
2. Obligations
3. Valuation (Face Value, Exchange Rate, NRV)
4. Existence (Cash Count, Bank Reconciliation, Interbank Transactions)
5. Rights
Composition of Cash
1. Cash on Hand = includes undeposited currency and coins, undeposited checks (payable to the entity or bearer), bank drafts and money orders.
2. Cash in Bank = demand deposit, checking account and saving deposit that are NOT legally restricted.
3. Cash Fund = are set aside for CURRENT purposes such as petty cash fund, payroll fund and dividend fund.
Composition of Cash Equivalents
*Commercial Paper / Money Market Instrument / Time Deposit / Treasury Bills
acquired at MOST three months before maturity.
Initial Valuation
*Face Value
Subsequent Valuation
*General Rule = Face Value
*Except:
a. Foreign Currency
*at Current Exchange Rate
b. Cash in Financial Institutions with Financial Difficulty or in Bankruptcy
*lower of NRV or Face Value
Necessary Disclosures:
1. Temporary Placements of Excess Cash (Predetermined)
2. Cash Compensating Balance
Other Things to Remember:
1. Bank overdrafts are liabilities. Offset it only against other existing accounts in the same bank to reflect the total balance of your account in that bank.
2. Post-dated checks are not yet part of cash receipts or disbursements because before the date written on the check, the holder of such CANNOT encash it yet.
3. Commercial Paper / Money Market Instrument / Time Deposit / Treasury Bills with 3 months left until maturity but purchased more than 3 months before maturity are still classified as short-term investments because the standard says so. The standard does not consider it as "highly liquid".
4. Undelivered checks are still part of cash and removed from cash disbursements because the payment of a check requires its delivery to the payee.
5. Returned checks are restored back to its corresponding receivable or payable because there was no encashment made by the payee.
6. Stale checks are restored back to its corresponding receivable or payable because the negotiability of the check expired. Banks usually don't honor checks that are not encashed within a "reasonable time" (normally within six months) after the indicated issue date. If the amount of the stale check is immaterial, it is normally accounted as miscellaneous income or expense.
7. Legally restricted compensating balances carries the classification of its related loan (either short-term or long-term investment). It is not classified as cash because you cannot withdraw such amount immediately.
8. NSF or DAIF checks are debit memos from the bank because no amount was collected from such check. Therefore, the corresponding receivable of such check is restored.
Cash Short or Over
*Accountability = the amount of cash that MUST BE present.
*Accounted for = the amount of cash COUNTED.
*Cash Shortage if Accountability > Accounted for
*Cash Overage if Accountability < Accounted for
In computing for the cash shortage or overage, do not account for cash that you did not include in the accountability.
Bank Reconciliation
1. Book reconciling items:
a. Credit memos
b. Debit memos
c. Book errors
2. Bank reconciling items:
a. Deposits in transit
b. Outstanding checks
c. Bank errors
Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards
1. Completeness (Cut-off, Proof of Cash)
2. Obligations
3. Valuation (Face Value, Exchange Rate, NRV)
4. Existence (Cash Count, Bank Reconciliation, Interbank Transactions)
5. Rights
Composition of Cash
1. Cash on Hand = includes undeposited currency and coins, undeposited checks (payable to the entity or bearer), bank drafts and money orders.
2. Cash in Bank = demand deposit, checking account and saving deposit that are NOT legally restricted.
3. Cash Fund = are set aside for CURRENT purposes such as petty cash fund, payroll fund and dividend fund.
Composition of Cash Equivalents
*Commercial Paper / Money Market Instrument / Time Deposit / Treasury Bills
acquired at MOST three months before maturity.
Initial Valuation
*Face Value
Subsequent Valuation
*General Rule = Face Value
*Except:
a. Foreign Currency
*at Current Exchange Rate
b. Cash in Financial Institutions with Financial Difficulty or in Bankruptcy
*lower of NRV or Face Value
Necessary Disclosures:
1. Temporary Placements of Excess Cash (Predetermined)
2. Cash Compensating Balance
Other Things to Remember:
1. Bank overdrafts are liabilities. Offset it only against other existing accounts in the same bank to reflect the total balance of your account in that bank.
2. Post-dated checks are not yet part of cash receipts or disbursements because before the date written on the check, the holder of such CANNOT encash it yet.
3. Commercial Paper / Money Market Instrument / Time Deposit / Treasury Bills with 3 months left until maturity but purchased more than 3 months before maturity are still classified as short-term investments because the standard says so. The standard does not consider it as "highly liquid".
4. Undelivered checks are still part of cash and removed from cash disbursements because the payment of a check requires its delivery to the payee.
5. Returned checks are restored back to its corresponding receivable or payable because there was no encashment made by the payee.
6. Stale checks are restored back to its corresponding receivable or payable because the negotiability of the check expired. Banks usually don't honor checks that are not encashed within a "reasonable time" (normally within six months) after the indicated issue date. If the amount of the stale check is immaterial, it is normally accounted as miscellaneous income or expense.
7. Legally restricted compensating balances carries the classification of its related loan (either short-term or long-term investment). It is not classified as cash because you cannot withdraw such amount immediately.
8. NSF or DAIF checks are debit memos from the bank because no amount was collected from such check. Therefore, the corresponding receivable of such check is restored.
Cash Short or Over
*Accountability = the amount of cash that MUST BE present.
*Accounted for = the amount of cash COUNTED.
*Cash Shortage if Accountability > Accounted for
*Cash Overage if Accountability < Accounted for
In computing for the cash shortage or overage, do not account for cash that you did not include in the accountability.
Bank Reconciliation
1. Book reconciling items:
a. Credit memos
b. Debit memos
c. Book errors
2. Bank reconciling items:
a. Deposits in transit
b. Outstanding checks
c. Bank errors
Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards
Tuesday, January 21, 2014
Lesson 1 AP: Minimum Composition of the SFP and Some Audit Notes
Statement of Financial Position
AssetsCurrent Assets
1. Cash and Cash Equivalents
2. Financial Assets at Fair Value (Trading Securities)
3. Trade and Other Receivables
4. Inventories
5. Prepaid Expenses
Non-Current Assets
1. Property, Plant and Equipment
2. Long Term Investments
3. Intangible Assets
4. Other Non-Current Assets
Liabilities
Current Liabilities
1. Trade and Other Payables
2. Current Provisions
3. Short Term Borrowing
4. Current Portion of Long Term Debt
5. Current Tax Liability
Non-Current Liabilities
1. Non-Current Portion of Long Term Debt
2. Finance Lease Liability
3. Deferred Tax Liability
4. Long Term Debt to Entity Officers
5. Long Term Deferred Revenue
Shareholder's Equity
1. Paid-in / Contributed Capital
2. Other Comprehensive Income or Losses / Unearned Capital
3. Accumulated Profits or Retained Earnings
Essential Characteristics of an Asset
1. Controlled by the entity
2. Result of past transaction
3. Provides future economic benefits
4. Can be measured reliably
Essential Characteristics of a Liability
1. Present obligation of the entity
2. Result of past transaction
3. Requires an outflow of entity's resources
Some Audit Notes:
Counterbalancing Errors (IPADA)1. Inventories
2. Prepayments
3. Accrued Expenses
4. Deferred Income
5. Accrued Revenue
Change in Accounting Policy and Prior Period Errors
*Retrospective except when impracticable
Change in Accounting Estimate
*Prospectively
Accounting Estimates (FWIBU)
1. Fair Value of Financial Asset or Liability
2. Warranty
3. Inventory Obsolescence
4. Bad Debts
5. Useful Life
Sources: Financial Accounting 1 (Valix et. al), Advanced Auditing (Espenilla) & The Accounting Standards
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