Kiting/ Lapping

CASH, is the most liquid asset and has the highest risk of being misstated. Kiting and lapping are typical examples of stealing money/ embezzlement.

KITING/ LAPPING
For the purpose of CPA exam, we can understand Kiting/ lapping as methods of hiding the Company's Cash position.

Kiting-- As per BECKER textbook, "Kiting occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank."

Two banks BANK 1/ BANK 2.
COMMONSENSE
if a check is drawn on BANK 1----balance of bank 1 should go down and
if a check is deposited in BANK 2----Bank balance increase.


But the actuality is that NO disbursement, is recorded in BANK1, until after year end i.e. BANK 1 continues to show a higher balance on 31st Dec, but at BANK 2 the deposit is recorded before year end i.e. BANK 2 too shows a higher bank balance on year end, 31st Dec/ whatever if the fiscal year ending date.

Kiting is detected by preparing a BANK TRANSFER SCHEDULE,

Bank Transfer Schedule : It's a document prepared by the auditor to record
all transfers between company bank accounts for a few days before, and a few days after year-end dates transfers cleared the bank and dates they were recorded in the books essentially an auditor checks whether deposit and withdrawal were recorded in the same accounting period.

KITING is indicated when the date stamped by the receiving bank precedes the date on which the disbursement was recorded.

LAPPING