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During the year, Strang Corporation began to encounter cash flow difficulties, and a cursory review by management revealed receivable collection problems. Strang's management engaged Elaine Stanley, CPA, to perform a special investigation. Stanley studied the billing and collection cycle and noted the following.

The accounting department employs one bookkeeper who receives and opens all incoming mail. This bookkeeper is also responsible for depositing receipts, filing daily remittance advices, recording receipts in the cash receipts journal, and posting receipts in the individual customer accounts and the general ledger accounts. There are no cash sales. The bookkeeper prepares and controls the mailing of monthly statements to customers. The concentration of functions and the receivable collection problems caused Stanley to suspect that a systematic defalcation of customers' payments through a delayed posting of remittances (lapping of accounts receivable) is present. Stanley was surprised to find that no customers complained about receiving erroneous monthly statements.

Identify the procedures that Stanley should perform to determine whether lapping exists. Do not discuss deficiencies in the system of internal control.

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Solution Summary

Identify the procedures that Stanley should perform to determine whether lapping exists. Do not discuss deficiencies in the system of internal control.

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In order to determine whether lapping exists, Stanley would test the aging of accounts receivable and then:

1. Mail positive accounts receivable confirmation requests directly to all customers with past due balances.

2. Investigate exceptions noted on returned confirmations.

3. Obtain authenticated deposit slips ...

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Sandeep Bardia, MBA
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  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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