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How to audit account receivable easily

How to audit account receivable easily

Accounts receivables occurred when company sells goods, products or services on credit to their customers. Companies need to control tight accounts receivables to avoid fraud or error.

In some cases, there may be the following mistakes that may incur:

  1. Customers repaid their accounts receivable but we recorded incorrectly. For example, payments of $1,000 are recorded $900 or $1,100.
  2. Customers not repaid their accounts receivables but we recorded as payment receipt. For example, Customer A did not repay us, but we recorded payment receipt of $700 (i.e.).
  3. Wrong customers’ names are recorded. For example, we received payment receipt of $2,000 from Mr. A, customer, but recorded payment receipt from Mr. B.

To avoid the errors or frauds above, the audit procedures for accounts receivable are as follows:

1. List of accounts receivable

We will request list of individual account receivable from each customer and control account of account receivable. You may know that control account must equal sum of individual account receivable.

For example, Total AR = AR, Mr.A + AR, Mr.B + AR, Mr.C + AR, Mr.D+…..+ AR, Mr.Z

2.Audit time of Accounts receivable

We should determine time or period for audit of accounts receivable, 1 month, 2 months, 3 months, 1 year or 2 years so on. From example, we decided to audit accounts receivable for 2 months from 1 November 2017 to 31 December 2017.

3.Request beginning balance and ending balance  

We will request beginning and ending balance for each account receivable from each customer. At step 2, we determined audit time from 1 November 2017 to 31 December 2017, so beginning balance is 1 November 2017 and ending balance at 31 December 2017.

4.Sample Size or Population

We should determine sample size or population to audit accounts receivable. For example, we assume 26 customers (Mr. A, Mr. B, Mr. C,…., Mr.Z) between 1 November 2017 and 31 December 2017. How do you decide for size of auditing? If we choose sample size less than 26 customers, so it is sample size. For example, we decided to choose 10 customers among 26 customers. If we decided to choose all 26 customers for auditing accounts receivable, so it means that it is population.

5.How to select sample

At step 4, we decided to choose 10 customers among 26 customers for auditing accounts receivable. How can we select these accounts receivable?  If we chose Mr. A, Mr. B, Mr. C, Mr. D, Mr. E, Mr.F, Mr. G, Mr. H, Mr.I and Mr. J, and how about Mr. K, Mr. L, Mr. M,….Mr. Z?

There are many sample section methods as follows:

  • Random section
  • Value weighted selection
  • System Systematic selection
  • Block sampling
  • Judgemental/ haphazard selection

6. Soft data journal /transaction records

Different companies or organization will use different account systems. Some used Quickbooks or Peachtree while other companies used other accounting systems.

For this case, we request journal entry and transaction records as soft data from these accounting systems for 2 months from 1 November 2017 and 31 December 2017.

7. Hard accounting documents

Hard accounting documents are import to verify with accounting systems and accounts receivable balance whether they are correct or not.  Hard accounting documents for accounts receivable may be requested as follows:

  • Customer order
  • Sale order
  • Delivery note to customer
  • Official invoice
  • Credit note
  • Official receipt
  • Contracts with customers
  • Daily cash report ( most important)
  • Bank statement and bank reconciliation etc.

8.Audit Procedures and assertions

We will use audit procedure to verify accurate accounts receivable and check accounting documents.

We may use the following audit procedures:

  • Inspection
  • Observation
  • Enquiry
  • Confirmation
  • Recalculation
  • Reperformance
  • Analytical procedure

We need to know the following transactions, events and account balance assertions:

Transactions & Events:

  • Occurrence
  • Completeness
  • Accuracy
  • Cut-off
  • Classification

Account Balances:

  • Existence
  • Rights & Obligations
  • Completeness
  • Valuation & Allocation