Cash Cycle Audits: Lapping, Kiting, Controls & Confirmation Tips
Overview: The cash cycle is a high-risk area in every audit because of its susceptibility to fraud. This guide breaks down common schemes like lapping and kiting, effective internal controls, and essential audit procedures to verify cash balances and transactions.
✅ Common Cash Frauds: Lapping & Kiting
Lapping: An employee steals cash receipts and covers it by applying subsequent receipts to prior accounts.
- Detect lapping by comparing recorded cash receipts with actual deposits.
- Use a lock box system to prevent access by employees.
- Confirm customer balances and issue timely statements.
Kiting: Overstating cash by recording the same funds in two banks.
- Prepare a bank transfer schedule near year-end.
- Check that the disbursement date in the disbursing bank precedes the receipt date in the receiving bank.
- Use a cutoff bank statement to verify deposits in transit and outstanding checks.
✅ Key Internal Controls
- Segregation of duties: Separate cash handling, recording, reconciling, and check writing.
- Use voucher systems for disbursements.
- Regular reconciliations and review by independent personnel.
✅ Bank Confirmations & Reconciliations
- Send standard bank confirmations to all banks the client does business with, even if no year-end balance exists.
- Confirm balances, loans, contingent liabilities, and security agreements.
- Test year-end bank reconciliations by footing reconciliations, agreeing balances to books and confirmations, and verifying deposits in transit and outstanding checks using a cutoff statement.
✅ Testing Cash Receipts & Disbursements
- Completeness: Trace remittance advices to the cash receipts journal and deposits. Trace canceled checks to disbursements journal.
- Cutoff: Verify that cash receipts and disbursements near year-end are recorded in the correct period.
- Valuation & Accuracy: Agree daily deposits to bank statements. Agree vouchers, purchase orders, and invoices to disbursements.
- Existence & Occurrence: Vouch journal entries back to original docs and bank statements.
- Presentation: Ensure cash is properly classified and disclosed: policies, restrictions, compensating balances.
✅ Required Disclosures
- Definition of cash and cash equivalents.
- Restrictions on cash (e.g., sinking funds).
- Compensating balance requirements.
🔗 Helpful References
👉 Keep your cash cycle clean — catch fraud, test smart, and confirm everything!
