Which of the following controls would best prevent the lapping of accounts receivables?

What is Lapping Fraud?

Lapping occurs when an employee alters accounts receivable records in order to hide the theft of cash. This is done by diverting a payment from one customer, and then hiding the theft by diverting cash from another customer to offset the receivable from the first customer. This type of fraud can be conducted in perpetuity, since newer payments are continually being used to pay for older debts, so that no receivable involved in the fraud ever appears to be that old.

Where Does Lapping Occur?

Lapping is most easily engaged in when just one employee is involved in all cash handling and recordation tasks. This situation most commonly arises in a smaller business, where a bookkeeper may be responsible for all accounting tasks. If these tasks are split up amongst several people (known as the segregation of duties), then lapping can only be conducted when two or more employees are involved.

How to Detect Lapping

Lapping can be detected by conducted a periodic review of the cash receipts records, to trace payments to outstanding receivables. If there is ongoing evidence that cash receipts are routinely being applied against the wrong customer accounts, then either the cashier is astonishingly incompetent or there is an active lapping scheme in progress.

Lapping typically requires that the person engaged in the fraud be involved every day, and so is unable to take any vacation time. Thus, having a person refuse to take the vacation time that they have earned can be considered a possible indicator of the existence of lapping.

Controls Against Lapping

There are many controls that can be used to prevent or detect lapping. Consider installing some or all of the following controls:

• Have someone other than the cashier send statements to customers. Customers know what they paid to the company, so they should be able to detect unusual payments ascribed to their accounts, or note that certain payments were never applied against their accounts.

• Contact customers and ask if they have received monthly statements from the company. The responsible party may have been intercepting and destroying the statements before they were mailed.

• Audit cash receipts transactions on a regular basis, as noted above.

• Require all employees in the accounting area to take all of their vacation time, without exception.

• Track the days of accounts receivable on a trend line. A gradual increase in this measurement can be caused by lapping.

• Tightly control the use of credit memos. A party committing fraud may attempt to terminate a lapping situation by writing off a receivable in the amount of the missing funds.

• Stamp all checks with "For Deposit Only," so that employees cannot deposit these checks to their own accounts.

• Have customers pay directly to a lock box, so that cash cannot be intercepted and stolen by employees.

Acconting Informatin System Quiz 2

1. Management can expect various benefits to follow from implementing a system of strong internal

control. Which of the following benefits is least likely to occur?

a. reduction of cost of an external audit

b. prevention of employee collusion to commit fraud

c. availability of reliable data for decision-making purposes

d. some assurance of compliance with the Foreign Corrupt Practices Act of 1977

e. some assurance that important documents and records are protected

2. Which of the following situations is NOT a segregation of duties violation?

a. The treasurer has the authority to sign checks but gives the signature block to the assistant

treasurer to run the check-signing machine.

b. The warehouse clerk, who has custodial responsibility over inventory in the warehouse, selects the

vendor and authorizes purchases when inventories are low.

c. The sales manager has the responsibility to approve credit and the authority to write off accounts.

d. The department time clerk is given the undistributed payroll checks to mail to absent employees.

e. The accounting clerk who shares the recordkeeping responsibility for the accounts receivable

subsidiary ledger performs the monthly reconciliation of the subsidiary ledger and the control

account.

3. The underlying assumption of reasonable assurance regarding implementation of internal control

means that

a. auditor is reasonably assured that fraud has not occurred in the period.

b. auditors are reasonably assured that employee carelessness can weaken an internal control

structure.

c. implementation of the control procedure should not have a significant adverse effect on efficiency

or profitability.

d. management assertions about control effectiveness should provide auditors with reasonable

assurance.

e. a control applies reasonably well to all forms of computer technology.

4. To conceal the theft of cash receipts from customers in payment of their accounts, which of the

following journal entries should the bookkeeper make?

DR CR

a. Miscellaneous Expense Cash

b. Petty Cash Cash

c. Cash Accounts Receivable

Which of the following control would best prevent the lapping of accounts receivable?

How can you prevent accounts receivable lapping?

Which of the following internal control activities most likely would deter lapping of collections from customers?

What does lapping accounts receivable mean?