Clients of the business undergoing an audit confirm assertions made in accounts receivable data. The actual existence of transactions is one assertion that accounts receivable confirmations can prove. For example, the auditor requests that a customer confirm that the customer holds an account balance with the company being audited. A positive confirmation from the customer confirms the existence assertion in the financial statements. Accounts receivable confirmations can also prove the assertion of rights. When customers confirm that an invoice is owed to the company, this proves the assertion that the business undergoing auditing has a right to the assets it claims in accounts receivable. In addition, by verifying the balance owed, the customer proves the accuracy assertion of the financial statements.
The auditor will compare the amount in the accounts receivable account in your general ledger with the grand total of your receivables in your period-end accounts receivable aging report, to check if the totals match. A mismatch indicates the presence of a wrong journal entry in the ledger account.
Matching invoices to shipping log
The auditor will match the date on each of your invoices with the shipment dates of the corresponding items in your shipping log. They will also examine invoices that were issued on dates after the auditing period. This is done because your sales must be recorded in the right accounting period, so it’s important to catch any invoices that should have been included in an earlier period.
Confirming receivables
In this part of the audit, the auditor directly contacts your customers to confirm any unpaid accounts receivable as of the reporting period’s end. This is done to verify the accounts receivable that you have recorded. Auditors usually select customers that have large unpaid balances first, then customers with overdue invoices, and finally customers with smaller receivable balances.
Reviewing cash receipts
The auditor will look for proof of the payments made by customers. This is a backup plan that’s used if the auditor fails to confirm the accounts receivable with your customers directly. If customers pay you via checks, the auditor looks for check copies, and attempts to confirm them with the bank or by checking your bank transactions.
Reviewing credit notes
Credit notes are important transactions because they can affect future transactions. Customers can deduct the credit note amount the next time they pay you for goods or services. This makes their payment different from the original invoice amount, which affects your receivables. The auditor will review credit notes you have issued to your customers to make sure they were properly authorized and issued during the correct period. The auditor will also check if the circumstances under which you issued them were legitimate and match the records of issued credit notes.
Trend analysis
Auditors use trend lines to compare accounts receivable with the company’s sales or current assets. Trend lines, usually used in technical analysis of budgeting and forecasting, are graphed sets of data points that show how a particular financial figure is trending. They help auditors analyze patterns and conduct inquiries if they spot anomalies like an increase in accounts receivable or revenue without a proportionate increase in sales or assets.
Preparing for the audit
So how do you get your business ready for an AR audit?
- Get an accounting system that helps create invoices and other sales transactions
- Collect payments and update the corresponding invoices to paid status
- Keep track of credit notes and refunds
- Reconcile your bank accounts
Get audit-ready in no time
When an audit is around the corner, it is best to have clear and easy-to-track records of your accounts receivable. It is not impossible to get your records sorted for the audit by hand. However, a modern accounting system that uses automation to keep your accounts receivable audit-ready can cut down hours of manual work and eliminate undesirable errors. AR automation helps you schedule invoices and payment reminders, while also updating invoices with their corresponding payment status through workflows. The result is well-organized accounts receivable records and a smooth audit procedure.
What is generally accepted audit procedure?
Generally accepted auditing standards (GAAS) are a set of principles that auditors follow when reviewing a company's financial records. GAAS helps to ensure the accuracy, consistency, and verifiability of an auditors' actions and reports.
What are the audit procedures for accounts receivable?
During an audit, the auditor will try to determine whether:.
Your balance sheet reflects your accounts receivable accurately..
Refund records for returned items are accurate..
Proper measures are taken to prevent misappropriation of non-electronic payments in the form of cash and checks..
What type of audit evidence is accounts receivable?
Confirmations are one type of audit evidence an auditor will use to find out if the data being audited is recorded properly. Customers confirm accounts receivable, just as vendors confirm accounts payable data.
Is the confirmation of cash and accounts receivable required according to auditing standards explain?
Is the confirmation of cash and accounts receivable required according to auditing standards? Yes, usually required by auditing standards but auditors can choose not to in certain situations. It then becomes the auditors responsibility to gather evidence which can take much more time.
