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Define lapping and give an example

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Can anyone help with the following study guide? Thank you.

1. Define lapping and give an example.

2. What is a substantive test of transactions? How would it be applied to accounts receivable an inventory?

3. What is the difference between a positive and negative confirmation? When are they used and why?

4. List the inherent risk factors that affect the inventory management practices.

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Hi there,

Here are your answers:

1. Lapping does not actually involve the misappropriation of funds but is a fraud that may be committed by an employee to conceal a misappropriation of funds, usually funds paid by a customer of the employer. The employee conceals the misappropriation by applying funds subsequently paid by a second customer to conceal the deficiency in the first customer's account. However, this means that the accounting records would show an amount owing by the second customer that had in fact been paid. The employee then uses funds paid by a third customer to conceal the deficiency in the second customer's account. The employee continues this "lapping" of customer's funds until the fraud is ultimately discovered, which may be some months after the initial misappropriation and perhaps after the employee resigns his/her employment from the entity.

Follow the following link for a good real life example of lapping:

http://www.journalofaccountancy.com/Issues/2002/Feb/LappingItUp.htm

2. What is a substantive test of transactions? They are activities that gather evidence as to the completeness, validity and/or accuracy of account balances and underlying classes of ...

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