Question

Explain what lapping means, and discuss the internal control deficiency that allows it to occur. Also discuss the procedures the auditor can perform to detect lapping.

Answer 1

What is Lapping?

It is a form of fraud or embezzelment of cash, done by the employee of the company.

Under this, Employee enters the transaction in the accounting system of company whenever the cash is realised from any debtor. Assuming he realised cash from a debtor(MR X) but did not recorded such transaction in the company’s book of accounts and used such cash for personal purposes. The next day another debtor (MR Y) makes payment but instead of recording such payment in his name, he records that money is received from Mr X. Further when payment is received from the other debtor(MR Z) it is recorded in the name of MR Y. Hence the cycle goes on.

The above procedure done by employee is called as Lapping.

The employee cover the cash shortage through repeated lapping. This procedure shall continue till such employee finds another way to conceal such embezzlement.

Internal control defeciencies that allow this to occur:

1. Seggregtion of duties: Had the proper seggregation of duties been made, that is person receiving the cash and person recording such transaction in books of accounts, are two different persons, the occurance of this type of fraud ie lapping can be reduced to a great level.
2. Regular or surprise cash audits: Had the regular or surprise cash audits been made, the shortfall amount could have been detected earlier. Lappig schemes can hide the theft om temporarily basis and such surprise or regular audits will detect such fraud.

Audit procedures to detect lapping:

1. Remittance advices: Generally whenever debtor makes payments to the seller, he sends a remittance advice to the seller informing him that payment has been made with respect to the invoice issue to him. Hence, such remmitance. The date and amount received mentioned in such Remittance advices can be reconciled with the date and amount entered in cash book of company.
2. External confirmation: auditor can obtain a external confirmation from debtors asking them about their balance with the company. Such confirmation then can be reconciled with the accounts receivables list of company. Any mismatch occuring will be the indicator of possible lapping scheme.