Cash Cycle M3

Question 1

What is Lapping?

Answer 1

Concealing the payments received and not recording the current receipt of cash or checks, which is covered by using a subsequent receipt for the previous unrecorded amount.

Question 2

How to prevent and detect lapping?

Answer 2

All of the following are effective ways to prevent and/or detect lapping:

• Independently comparing the recorded cash receipts with funds actually deposited in the bank.
• Requiring that customers send their payments directly to a lock box.
• Comparing the dollar amounts and dates on the bank deposit slips with customer remittance credits entered into the accounts receivable ledger.

Question 3

What is Kiting?

Answer 3

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.

Question 4

How to detect kiting?

Answer 4

• Frequent kiting may result in a high level of deposits coupled with a low average balance.
• Preparing a bank transfer schedule.
• An examination of a cutoff bank statement for deposits recorded in the books, but not by the bank.

Question 5

What is the most effective internal control relating to cash?

Answer 5

• The internal auditor generally is independent of other functions relating to cash and should be the one to receive the bank statements directly from the bank.
• Segregate Authority, record keeping, and custody activities from receipt of bank statements, such as Controller who has Authority, from the AP/AR who has record keeping, from Treasure who has custody, should not receive the bank statements.

Question 6

What constitutes a misstatement in cash?

Answer 6

• Payments not recorded in the same period of the deposit.
• Disbursements and the deposits must be
  recorded in the same period.

Question 7

What can create misstatements in bank transfers?

Answer 7

Disbursement book dates after receipt book dates especially in different periods or years.