How to Audit Accounts Receivable
A company's accounts receivable comprise open accounts of customers that owe the company for products or services. A transaction becomes a receivable once the customer is sent an invoice. These accounts collectively tend to represent the largest asset shown on the balance sheet. The company's accounts receivable are audited annually and in some detail. The main purpose of the audit is to reconcile the amounts reflected in the ledger with the balances on the invoices.
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Things You'll Need
- General ledger
- Accounts receivable summary reports
- Invoices and cash receipts
- Credit memos
- Shipping logs
Instructions
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Obtain a detailed listing of all accounts receivable balances. Before you start the audit, make sure you have all the records, receipts and reports, preferably sorted in the order of the age of receivables.
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Reconcile the general ledger with the accounts receivable summary report. Compare the entries in the period-end aging accounts receivable report with the general ledger. Also, compare the totals in the summary report with totals from the edger. Matching totals will flag any inconsistencies between the two entry files.
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Identify groups within the accounts receivable population. Using the summary report, sort accounts into following groups: "significant balances" (accounts with significant balances or one customer with numerous small account balances that, when totaled, are significant); "unusual accounts" (accounts with characteristics such as accounts regularly past due dates, an unusual customer name or accounts prone to misstatements); "credit balances"; and "related party accounts" (a related party transaction occurs when the policy of one entity can influence the other). Grouping accounts by their thematic characteristics helps ensure efficiency.
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Positively confirm selected accounts. If you have identified the ledger entries that reconcile with the entries in the summary report, or identified inconsistencies, mark them for confirmation. Send letters of confirmation to management, requesting and explanation for inconsistent accounts.
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Test accounts where there is no confirmation. For the accounts for which status cannot be confirmed with the summary report, reconcile them with other documentation, including invoices, sales orders, shipping logs and deposit slips. After marking a confirmation, again send letters requesting explanations where warranted.
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Assess allowance for doubtful accounts. Allowances for doubtful accounts are additional funds from sales, set aside in order to pay off estimated bad debt. Review the amount estimated as noncollectible. Determine whether the estimate is consistent with prior years, reasonable for the business and in compliance with the accounting policy.
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Review bad debt write-offs. Study the amount and volume of bad debt and compare it with the bad debt from the previous year Reconcile the write-offs with the related documentation to determine whether they are justified.
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Check the sales entry. Using samples from the account population, determine whether sales invoices are recorded correctly; also examine whether the credits are accounted for the returned goods. Determine whether there are unusually high volumes of returned goods or unusual fluctuations in sales. Any inconsistencies, at any stage, require letters sent to the management for further explanation.
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References
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