Audit and Assurance Practice Exam

Which explanation best describes the purpose of lapping?

1. Lapping is a technique used to properly account for cash received.

2. Lapping is a fraud technique to cover up the embezzlement of cash.

3. Lapping involves overstating revenue figures in financial statements.

4. Lapping is used to manipulate accounts payable entries.

The correct answer is: Lapping is a fraud technique to cover up the embezzlement of cash.

Lapping is fundamentally a fraudulent scheme employed to conceal the misappropriation of cash receipts. It typically involves taking payments received from one customer and applying them to another customer’s account, thus masking the theft of the funds. By doing so, the perpetrator creates an illusion that all accounts are current, preventing detection of the embezzlement over time. The mechanics of lapping rely on the timing of cash collection and the recording of those collections in the accounting system. When a new payment is received, it is used to cover the previous theft, thereby allowing the fraudster to appear as if they have a balanced cash position. This practice effectively delays the identification of the missing funds, making it difficult for auditors or accountants to detect the irregularity during standard reviews. Other options do not accurately capture the essence of lapping. Although lapping may seem to relate to cash accounting (as mentioned in option A), it is specifically associated with fraudulent activity rather than proper accounting processes. Overstating revenue figures (option C) or manipulating accounts payable entries (option D) are distinct types of accounting manipulation that do not describe lapping's particular method of masking theft.