How to Audit Accounts Receivable

If your company is subject to an annual audit, the auditors will review its accounts receivable in
some detail. Accounts receivable is frequently the largest asset that a company has, so auditors
tend to spend a considerable amount of time gaining assurance that the amount of the stated
asset is reasonable. Here are some of the accounts receivable audit procedures that they may
follow:

 Trace receivable report to general ledger. The auditors will ask for a period-end
accounts receivable aging report, from which they trace the grand total to the amount in
the accounts receivable account in the general ledger. (If these totals do not match, you
may have a journal entry somewhere in the general ledger account that should not be
there)

 Calculate the receivable report total. The auditors will add up the invoices on the
accounts receivable aging report to verify that the total they traced to the general ledger
is correct.

 Investigate reconciling items. If you have journal entries in the accounts receivable
account in the general ledger, the auditors will likely want to review the justification for
the larger amounts. This means that these journal entries should be fully documented.

 Test invoices listed in receivable report. The auditors will select some invoices from the
accounts receivable aging report and compare them to supporting documentation to see
if they were billed in the correct amounts, to the correct customers, and on the correct
dates.

 Match invoices to shipping log. The auditors will match invoice dates to the shipment
dates for those items in the shipping log, to see if sales are being recorded in the correct
accounting period. This can include an examination of invoices issued after the period
being audited, to see if they should have been included in a prior period.

 Confirm accounts receivable. A major auditor activity is to contact your customers

directly and ask them to confirm the amounts of unpaid accounts receivable as of the end
of the reporting period they are auditing. This is primarily for larger account balances,
but may include a few random customers having smaller outstanding invoices.
 Review cash receipts. If the auditors are unable to confirm accounts receivable, their
backup auditing technique is to verify that customers have paid the invoices, for which
they will want to review check copies and trace them through your bank account.

 Assess the allowance for doubtful accounts. The auditors will review the process that
you follow to derive an allowance for doubtful accounts. This will include a consistency
comparison with the method used in the last year, and a determination of whether the
method is appropriate for your business environment.

 Assess bad debt write-offs. The auditors will compare the proportion of bad debt expense
to sales for this year in comparison to prior years, to see if the current expense appears
reasonable.

 Review credit memos. The auditors will review a selection of the credit memos issued
during the audit period to see if they were properly authorized, whether they were issued
in the correct period, and whether the circumstances of their issuance may indicate other
problems. They may also review credit memos issued after the period being audited, to
see if they relate to transactions from within the audit period.

 Assess bill and hold sales. If you have situations where you are billing customers for
sales despite still retaining the goods on-site (known as "bill and hold"), the auditors will
examine your supporting documentation to determine whether a sale has actually taken
place.

 Review receiving log. The auditors will review the receiving log to see if it records an
inordinately large amount of customer returns after the audit period, which would
suggest that the company may have shipped more goods near the end of the audit period
than customers had authorized.

 Related party receivables. If there are any related party receivables, the auditors may
review them for collectibility, as well as whether they should instead be recorded as
wages or dividends, and whether they were properly authorized.

 Trend analysis. The auditors may review a trend line of sales and accounts receivable, or
a comparison of the two over time, to see if there are any unusual trends. Another
possible comparison is of receivables to current assets. They may also measure the
average collection period. If so, expect them to make inquiries about the reasons for
changes in the trends.
Key Assertions Of Cash And Bank Audit
Existence
Existence assertion is ensuring that the cash and bank balance on the balance
sheet really exist at the reporting date.

Completeness
Completeness is ensuring that all cash and bank transactions are completely
recorded. The completeness is testing that no cash and bank transactions are
missed from the accounting records.

Accuracy
Accuracy is checking that the cash and bank stated on the reconciliation is accurate.

Valuation
Valuation is ensuring that the reported cash and bank balance truly reflect the
underlying value of cash and bank.

Key Audit Procedures For Cash And Bank Audit

The first important task for the auditor is to get a clear understanding of the client’s policy and
procedure for cash and bank. This will help the auditor to plan audit procedures for ‘cash and cash
equivalents’. They will need to get idea about the number of banks, types of bank accounts, authorized
signatories, authorization matrix, bank payment process, petty cash payment process etc.

The auditor will need to compare cash balances to the prior period in order to examine if there is any
fluctuation of cash between the two periods. If there is any fluctuations the auditor will need to evaluate
the reason behind it.

Auditor should send bank confirmation letters to banks to confirm the year end balances. Bank
confirmation letter is used for inquiry about the cash amount that the company has with the bank,
contingent liabilities and any other outstanding interests. Then verify the balance as per the bank
account to the bank confirmation letter.

The auditor can perform a physical cash count or surprise cash count and obtain a cash count certificate
from the client. Cash balance should be verified if there are any material or irregularity suspected. The
cash count shall be performed at the same time and for all cash balances including the negotiable
securities if any. After the cash count, auditor shall perform the reconciliation and investigate is any
discrepancies. Bear in mind that, auditors shall not left alone during the cash counting procedure.

For bank payments and petty cash payments auditors need to check whether controls are working
effectively and the test can be performed on sample basis.
The auditor should obtain the authorization matrix and the list of authorized signatories and match
them. They should inquire whether there is any addition or deletion of authorized signatories in the list
and if any they should check those addition or deletion have been informed to the bank.

They should check the overdraft balances and ensure the balances are reflected in the balance sheet as
current liabilities. In addition, auditors shall also consider if there is a legal right to set-off of overdraft
balance against the positive bank balances.

Auditors shall determine if the bank accounts are subject to any restrictions. This is done by inquiring
with management. They also need to inquire management if there is any escrow accounts maintain in
the company. The management of escrow accounts shall be in compliance with local regulation.

They should inquire about fixed term deposits and ensure the fixed term deposits that are less than 3
months will be considered as cash and cash equivalents.

Test for proper classification of cash need to be performed. If an entity has contractual obligations
related cash collateral, auditor should examine those agreements to ensure proper classification.

Analytical testing on the bank account balances need to be performed to see how much bank balances
have been increased or decreased and inquiries with management are required about any significant
variance.

If there is any foreign currency bank accounts, auditors need to check the appropriate exchange rate is
used for the presentation of those foreign currency account balances.

Auditor should ensure interest income is correctly recorded in accrual basis rather than cash basis.

Auditors need to test the bank reconciliation process. Generally, auditors review the bank reconciliation
statement at the year-end to ensure the client has taken into account all adjusting and reconciling items.
They should verify the reconciliation balances agree with general ledger balance at the year end and the
proper reflection of the balance in the financial statements. In addition, they also can perform the
arithmetic check on the bank reconciliation performed by client to ensure the accuracy.

Auditor shall trace outstanding check as per the bank reconciliation to the cash book prior to the year
end and to the bank statement subsequent to the year end. In addition, auditors shall also review the
bank reconciliation from prior year and trace the outstanding check to see if those have been cleared.
Then, auditor shall obtain explanation for any large or unusual items that have not been cleared during
the audit.

Perform the review or inspection on the cash book and bank statements before and after the year end
to see if there are any exceptional entries or transfers which have a material effect on the balance.

All cash and bank audit procedures need to be properly documented and all audit documents should be
dated with authorization of the preparer and reviewer.

Finally, auditors shall review the disclosure note to financial statements relation to the cash and bank to
ensure that it is in accordance with International Financial Reporting Standards or any local regulation.