 Hello and welcome to the session. This is Professor Farhad in which we would look at CPA questions that deal with the revenue cycle. This topic is covered in an auditing course as well as the auditing CPA exam. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lectures, please like them, share them, subscribe to the channel. If they benefit you, it means they might benefit other people, share the wealth, connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources to supplement your accounting education. For example, if you are taking an auditing course, I do have a full auditing course on my website. If you are studying for your audit CPA exam, I do have a section for the auditing CPA exam. If you are serious about passing your exam, if you want to put those 10 to 15 additional points on your CPA exam, I strongly suggest you check out my website and this is my auditing course. Let's start with looking at some questions. Just again, I've got familiar with this process. Once again, if you need more additional explanation about any particular topic, I strongly suggest you visit farhadlectures.com. Which of the following involve a theft of receivable followed by a delay in the posting of credits to a specific customer account? Is it kiting or is it lapping? Or is it both? Or is it neither? So simply put, do you know the definition of kiting? Do you know the definition of lapping? If you do, you'll be able to answer these questions. So basically, this is a definitional questions part of the revenue cycle when you're auditing the revenue cycle. And simply put, when you steal money from an account receivable by delaying the posting of crediting to a specific customer, the process is called lapping. What is lapping? Simply put, you received, let's assume you received $5,000 for a particular day. And those $5,000 supposed to go into account number A, B, C and E. And E, let's make it E. And also just to make this simple, each customer, they paid $1,000. So each customer will have $1,000. So you're supposed to post those $5,000 to each account separately. So what you do, you post for A, B, C and D, and you pocket this $1,000. So A, B, C and D, the account is updated, and you pocketed this $1,000. You just use it for your own personal use. Now the following day or day or two later, you would receive another $5,000. Now, those $5,000 is for F, G, H, you guys get the points. What you do with this new $5,000, you'll pay E and you will keep one customer unpaid and the process repeats itself. So this is what lapping is. It's the stealing of a receivable followed by a delay in the posting of credits to a specific customer. Now how can a company eliminate this type of fraud, eliminate lapping? Basically what you need to do, the person that post to the account should not also deposit the money. So we have a segregation of duties. Depositing the check and crediting the account should be two separate people. This way, you can do it. You cannot keep your money for yourself. Kiting is what is kiting. Kiting is when you make the money appear in two different bank accounts at the same time. And I do have a recording about kiting. But the definition that you're being asked about is B lapping. And I talk about lapping in my auditing course as well. Let's take a look at this revenue cycle. Which of the following department prepares the sales order and improve the customer for credit? So which department prepares the sales order? Well, it's the sales department. So immediately you could eliminate A and B because it's the sales department, the sales department. Which department authorizes the credit? So which department says, yes, it's okay. We can sell to this customer. They have a good credit. Well, for one thing, if you're down to 50-50, the same department should not do both. So you could immediately eliminate D and keep C. But you have to understand why C. The people in the sales department, they might have every incentive to approve the sale. Why? Because their performance could be based on sales. So they have every incentive to approve every sale. Therefore, you don't let them approve the sales. Because that's basically a violation of segregation of duties. You would have a credit department that's separate to authorize the credit. Think about one. I'm sure some of you experienced this. When you go to the mall, well, not these days with the COVID-19, but when we used to go to the mall, what happened is they'll say, oh, why don't you open a credit card? And you'll be able to, we'll get you 10% off. So what they do when you open the credit card, the person that's selling you that's making the sale doesn't open the credit card for you. Usually they have to call an 800 number. Or they ask you to go on a computer and input the information. Simply put the sales department the person that's making the sale cannot also approve your credit. A credit department will have to approve whether we should sell you on credit or not. Therefore, the answer is C as in Charlie. C as in Charlie. Let's look at this question. Within the proper segregation of duties for the revenue cycle. Again, we're talking about the revenue cycle. Which of the following department represent an example of custody? So you have to be familiar with the revenue cycle, which department are involved. And simply put here that they're asking us which department is considered custody. Custody means they hold the asset. Now without knowing anything, you might be able to answer this question. So who holds the product, custody of the product? Well, what can we do immediately? If you're looking at ABCD, if you know anything about the revenue cycle or the purchasing cycle, you could eliminate C. Why? Because the receiving department is part of the purchasing cycle, which I also cover. And I might do a session about the purchasing cycle. So immediately you could take out C. The receiving room is part of the purchasing department. So it's not part of the revenue cycle. You could also take out B. And hopefully you know why? Billing is accounting. So it's not part of custody. And remember, accounting, if it's a billing is accounting, accounting cannot have custody. Remember, those two things, they have to be separate. Accounting and custody, they cannot be combined. If you have access to the record, which is you have access to the accounting record, you have access to billing, you should not have custody of the asset. So B is a no-no. Well, think about it now. You're down to 50-50. If you want to take a guess, which one is the custody? Is it the shipping or is it the warehouse? Who holds the asset? The warehouse holds the asset. So what's the... So but the shipping also get their hands on the asset because they ship it. Yes, shipping, they execute the order. Shipping also, they work as a reconciliation process. What do I mean by reconciliation process? Remember, the shipping department, they're going to be receiving two different things. They're going to be receiving a sales order from the credit department. From the credit department. Remember, the credit department approve the sales order. They're going to be receiving the sales order from the credit department. But also, what they would also receive, they would receive a sales order from the warehouse. Also the warehouse, sales order from the warehouse. Why? Because the warehouse, my pen is acting up, because the warehouse kind of transferred the goods to them, to the shipping people with a sales order from the warehouse, and they basically, they match those two. Say they reconcile, then they ship it, then they prepare the shipping document. So that's why it's an execution and reconciliation, not custody. Custody is a warehouse department. And hopefully by just using your common sense, you should be able to kind of, you should be able to kind of, well, think custody, the warehouse, the warehouse have custody of the product. Let's take a look at this question. An auditor begins with a sample of bills of lading and traced forward into the accounting record. If a sales invoice was not found for a particular shipment, the auditor could suspect that goods were shipped out fraudulently on consignment, one, both, neither, so on and so forth. So first of all, do we know what bills of lading is? Bills of lading is basically the carrier. For example, let's assume you drive a delivery truck and you, that's all that you ship product from one company to another. So what happened is when they give you the product, you just have to prepare the bill of lading talent, you know, who's the shipper? Who's the consignee? Where are you shipping from? What's the destination? And what are you carrying basically? So if the auditor starts with this document, then trace forward into the accounting record. What do you expect to find? If you have, if the company shipped something, you expect to find a sales order. But here that we assume is you, you, you looked at the bills of lading and there's no sales order. There's no sales order. That's what we're assuming. What could you suspect? Well, you could suspect fraudulent, shipped out fraudulently. Sure. Somebody could be stealing, stealing from the company. There's no sales. Why did we ship it? Who are we shipping it to? So A is correct. So one will still, one would survive. Two will be out. D will be out. Now all we have to know all we have to know is, is too correct. It could be goods on consignment. That's also correct. If we're shipping something goods on consignment, it could be both A and B. And always for goods on consignment, I give this example PepsiCo, PepsiCo, Pepsi and Walmart. So what happened is Pepsi, they ship goods to Walmart, they ship goods to Walmart. And when they ship goods to Walmart, they don't really sell it. All what they do is they ask Walmart to place the product on their shelves until Walmart sells it. So if you go to a Pepsi warehouse and you see that they shipped something, they shipped, you know, 500 units, 500 bottles. Well, but you don't see a sales order because they were shipped to Walmart. They're goods on consignment. We can, we cannot record. There's no sales order until Walmart sells them and we record the sale. So it could be both. It could be either fraud, not both. It could be either fraudulently. This shipment is fraudulent. Or it could be that we ship it goods on consignment to a third party, to a second party or third party for the company for sale. It could be either or. As always, I would like to remind you to visit my website if you have any concern about these topics and visit my auditing course where I covered revenue, cycle and debt, as well as other accounting topics. One subscription give you access to all my, I believe 15 different module or 20 different module and material and courses, especially if you're studying for your CPA exam, you can add 10 to 15 points. Good luck, study hard and stay safe during those coronavirus days.