A4 - Cash Cycle

Question 1

what is kiting (cover shortage of cash)?

Answer 1

Kiting occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank.

Ex: result of high level of deposits coupled with low average balance

to detect kiting, the auditor would likely to review the bank transfer schedule and follow up on all transfers for which the receipt date per bank/book is recorded in the accounting period before (December Y1) the disbursement date (January Y2)

Question 2

what is lapping (stealing/misappropriating cash receipts)?

Answer 2

Lapping occurs when one employee withholds funds received by customers for personal use and fails to apply these cash receipts/checks to the customers’ receivable balance.

when lapping occurs, an employee uses current remittances to conceal previously stolen remittances. Therefore, auditor should compare dates checks are deposited per bank statements with the dates remittance credits are recorded

A lockbox system is the best way to prevent lapping because customers pay entity directly and therefore the employees do not have access to cash receipts

Question 3

what is difference between bank reconciliation and bank confirmation?

Answer 3

• bank reconciliation: provides information about activity during the period as a proof of cash. It is a primary evidence regarding year-end cash balances in banks is documented in
• bank confirmation: confirms the balances at the end of a period (corroborate information regarding deposit and loan balances) and also provides information about contingent liabilities, actual loans, guarantee security agreements,…