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Explaining Audit Procedures for Accounts Receivable

Audit procedures are called audit programs by examiners, and they merely serve as guidelines and checklists of actions to perform during audit engagements. To provide an example, we focused on the details of the audit procedures for accounts receivables (AR), which we present in the succeeding sections.

In actual practice, audit techniques or styles in performing these procedures, developed by examiners through their skills and expertise, contribute largely to achieving the best audit results within a specified time frame.

The objectives, the extent, and the scope by which these procedures are performed may vary according to the role of the examiner, as internal or external auditor. These roles and objectives are discussed in full in a separate article entitled Financial Statement Audit vs. Forensic Accounting.

The term "extent" refers to the percentage of documents test checked for completeness or for accuracy of computations involved. An AR audit program may also include the tracing of transactions from the selling point, to payment activities, up to its final disposition as a paid account, a past due account, a doubtful account, or as a bad debt, as they are verified via random sampling of substantial balances or material amounts.

The term "scope" refers to the period covered based on cut off dates established by the internal or external financial auditors. To fraud examiners or forensic accountants, the scope refers to the specific account(s) under suspicions of fraud where dates could go as far back as necessary.

Conduct a cash count of money presently held on hand by the cashier or collector.

Ascertain if any collections from the previous day’s transactions are included and check the cash register’s tape if these monies were actually received after the depository bank’s closing time. The machine tape should bear the identifying marks of the control officer, to denote the start off point for undeposited collections.

Verify if this was included as the previous day’s transactions and properly included in the cashier’s daily transaction report.

Ascertain that cash collections received before the depository bank’s closing time are deposited to the company’s bank account as a matter of procedure.

Observe any instances that the cashier or collector took part in the recording of cash collections in the company’s books, at any time while acting in his or her capacity as cash custodian or collector.

This section continues on page 2.

Check the duties and responsibilities of the accounts receivable clerk to make sure they do not include receiving or collecting payments from customers as well as preparation and issuances of official receipts.

Secure the AR subsidiary ledgers maintained as the customers’ individual records.

Control the balances appearing on each subsidiary ledger account by extracting a print out schedule of said subsidiaries. Reconcile the total of the schedule against the AR balance appearing on the financial statement cut off date.

Take note of subsequent adjusting entries on any of the subsidiary ledgers after the cut off date of your schedule for AR subsidiary ledgers.

A separate schedule should be secured for the dormant and doubtful accounts and should form part of the total AR reconciled against the financial reports.

Ensure that the AR clerk has no access to dormant and doubtful items. Access, if any, should be granted through the control officer’s password.

All transactions affecting dormant and doubtful accounts should bear the approval of the control officer and another unit officer. Entries appearing on dormant AR subsidiary ledgers should bear the identifying initials of the control officer to signify that the entries were passed with the latter’s knowledge and supervision.

Check all accounting entries affecting the bad debt and allowance for doubtful accounts, from the previous audit cut off date through the current audit cut off date.

Test check computations of early payment discounts, past due interest charges, and late payment fees. Ascertain the dates of granting or imposition on the official receipts, that they reconcile with the dates when the payments were recorded.

Send confirmation letters to customers, indicating therein their account balances as of the cut off date in your schedule of AR subsidiary ledgers. Some letters may require additional requests for confirmation of payment details, re: dates, discounts, late payment fees, and all related amounts.

Verify the information provided in the Accounts Receivable Aging worksheet and make sure the totals tally against the past due ARs reflected in the financial reports.

Test check copies of collection letters being sent by the AR clerk. Take note of the procedures involved, the dates they were sent, and the diligence applied in collecting the ARs.

Determine the procedures implemented for processing and approving a customer’s credit account. There should be a responsible officer or approving committee involved before credit is approved.

Review the folders maintained for each AR customer and check the completeness of the required documents as bases for granting of approval.

Determine if photocopies on file have identifying marks to show that they were verified against the original by the control officer.

Check the appropriateness of the documents submitted: proof of employment, proof of salaries earned, credit scores, and credit reports.

Review copies of official receipts issued to customers and test check prices appearing on sales invoices and delivery receipts.

Take note of formally communicated customer complaints and what actions were taken to thresh out grievances. Find out if any corrective measures were instituted and, if necessary, investigate the actions taken to address the root cause of the problem(s).

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