Audit and Assurance Practice Exam

What practice is described as an employee selling a product but failing to record the transaction and stealing the cash?

1. Lapping

2. Skimming

3. Embezzlement

4. Fraudulent reporting

The correct answer is: Skimming

Skimming refers to the practice where an employee makes a sale and collects cash from the customer but fails to record that transaction in the company’s financial records. In this scenario, the cash received is effectively 'stolen' because it is not reported, and therefore the business does not reflect the sale in its accounting system. Skimming is a form of theft that is often difficult to detect because there is no record of the sale to reconcile against the cash collected. It usually occurs in cash-based transactions where the employee has control over the sales process and can manipulate the records. This practice undermines the integrity of financial reporting as it leads to understated sales and profits. While practices like lapping involve manipulating accounts receivable to conceal theft, embezzlement generally refers to the misappropriation of funds entrusted to someone in a position of responsibility. Fraudulent reporting involves intentional misrepresentation of financial statements. Skimming specifically captures the act of improperly handling cash without any documentation of the sale.